Lockdowns, rising infections of COVID-19 and decreased earnings have taken a toll on businesses’ balance sheets. In the short term, consumers have tightened purse strings and enterprises are weathering an economic slowdown. An offshoot of the decreased consumer spending has been tenants not meeting a lease’s agreed rents. There are legal solutions to accommodate the economic slow-down for both landlords and tenants to help businesses stay afloat—rent concessions.
Generally, rent concessions are a short-term arrangement where a tenant’s rents are reduced in exchange for another benefit given to the landlord. In light of the COVID-19 pandemic, negotiations with either a landlord or a tenant about rent concessions may be a wise business decision for both parties. For the landlord, especially in slow economic times, rent concessions keep the property occupied and ensure a consistent revenue stream. For the tenant, savings on rent can supplement the decline in revenues to help meet operating expenses. As for both parties, there are traps for the unwary in reformulating a lease to account for rent concessions.
The impact of COVID-19 has been felt by both landlords and tenants. The drop in corporate earnings as a result of COVID-19 will likely dampen a company’s ability to meet monthly rent payments. Major companies like Subway and Mattress Firm were reported to service only part of their commercial rents. Meanwhile, other companies like Urban Outfitters and The Cheesecake Factory plan to completely withhold rental payments. Even smaller companies have felt the impact of COVID-19 on earnings: of 1,000 small businesses surveyed, the Wall Street Journal reported that 30% failed to pay any rent in April and 20% only made partial payments. Overall, the sharp earnings across the corporate sector will likely have a significant impact on the sizable commercial rental industry.
The commercial real estate landscape involves significant monthly expenses. Green Street Advisors estimated commercial lease arrangements for shops and offices to total more than $10 billion a month. Green Street Advisor’s predictions were not isolated to only shops and offices, the Economist reported that Marcus & Millichap estimated that retail space rents are worth $20 billion a month. Businesses large and small are not alone in feeling the effect of COVID-19 on their balance sheets. Structuring rent concessions properly during the economic slowdown properly can protect the landlord-tenant relationship beyond the difficult economic times.
Negotiating a rent concession and lease addendum takes skill, practice, and foresight. The experienced lawyers of the Mansour Gavin real estate practice group are here to help meet your needs. Should you have any questions or would like further clarification on this or other real estate matters, reach out to Mansour Gavin’s Real Estate group or contact us today.