The economy has taken a significant hit during the COVID-19 pandemic. Thousands of small businesses have seen a reduction in revenue, and owners are looking for ways to keep their doors open.
A major concern for businesses with brick-and-mortar locations is how to make rent payments. Not only do they want to keep the company’s facilities, but they also want to be ready to go when the economy starts to recover. Here’s a guide with options on how to negotiate rent terms with your landlord so that both parties can get through this crisis amicably.
Review Your Lease
Start by reviewing your lease. Look for any references related to the conditions for a rent freeze or postponement of rent payments during a crisis or emergency or if the government forces you to shut down your business.
Most commercial leases will have a “force majeure” clause. However, this clause can cover a wide range of disasters and may not include pandemic issues related to COVID-19. The best way to determine your rights under force majeure is to have your attorney go over the lease.
Analyze Your Cash Flow Situation
To understand how to negotiate a rent payment plan, make a projection of your cash flow for the next three months. Include employee wages, rent, utilities, and any other expenses that absolutely must be paid.
Will you be able to survive on lower revenues and reduced expenses, or will you need to secure some type of short-term working capital loan?
What will your cash flow look like at 50% of normal sales revenues? At 25%? Or even with no revenue? These figures will give you some idea of the rent payments you’ll need to propose to your landlord. The objective is to reassure your landlord you have a plan.
Talk With Your Landlord
The next important step is to start talking with your landlord. You don’t want to lose your business, and your landlord doesn’t want to lose a tenant. This won’t benefit either of you.
Consider the constraints your landlord may face when making your proposals. Have a very open discussion. The Harvard Business Review notes how important it is to understand your landlord’s position. Be aware that while landlords may be willing to compromise, lenders may or may not be willing to approve, for legal reasons or otherwise, any rent payment concessions made by landlords.
Propose a Solution
A renegotiated rental agreement could include one or a combination of the following alternatives:
- Abatement – All or a portion of rent payments are forgiven for a specified period of time.
- Deferment – All or a portion of rent payments are postponed for a specified period of time.
- Rent reduction – Rent payments are reduced for the remaining time on the lease.
- Loan conversion for past due payments – Landlord converts past due payments into a loan payable over an agreed term. Tenant will pay current rent in full each month plus make payments on the loan.
Think of the best combination of options for your situation to present as a solution. For example, your proposal may involve a rent freeze or a combination of suspended payments in addition to negotiating lower payments over the remaining term of the lease. Any proposals could also be combined with outside small business financing.
Whatever agreement you come up with, get everything in writing and signed by both parties.
Tip: Nobody wants to hear what you can’t do. Landlords will not have the incentive to negotiate a new agreement if you state that you can’t pay the rent and don’t know if you ever will. Let your landlord know your plan for getting through the short term and your intentions to remain a good long-term tenant.
Although the previous Paycheck Protection Program has expired, Congress is considering a similar new bill. However, there is no assurance that a new version of the PPP will ever be passed.
Another funding option is to apply to the Small Business Administration (SBA) for an Economic Injury Disaster Loan. The SBA is currently accepting loan applications from small businesses that have lost revenues because of COVID-19. Be sure to look into all the funding options available to you and your business to ensure a solid financial future as the economy recovers.