The COVID-19 Impact on Lease Negotiations and Selling Your Business
Some of the biggest news of the CVOID-19 era has been the delicate lease negotiations between landlords and tenants. With reduced revenues, tenants struggle to make regular rent payments but don’t want to lose their locations for when things normalize again.
Landlords, especially those who also carry mortgages, cannot afford to be without rent for extended periods of time either. So what’s the answer? How do we strike the balance between the two? And what if you are selling your business at this time? How do the terms of your current lease affect your buyer?
Here are some answers that may help you navigate this process.
The Law Always Wins in Lease Negotiations
So in several cities, there are eviction moratoria in place. In some cases, like the one in San Francisco, the rules apply to only certain businesses, but most small to medium businesses will qualify. The rules are different in other cities in California and across the country, but there are currently no Federal or HUD protections in place that apply to commercial businesses.
What does this really mean though? While a landlord may not start eviction processes, the rules do not erase back rent or future obligations. They simply state that until we are a certain period beyond the current state of emergency the landlord cannot evict the tenant.
While some landlords are voluntarily offering breaks on rent, they are not legally obligated to do so. What are landlords doing instead?
- Offering Free rent for 1-3 months.
- Offering reduced rental rates short term, usually a 30-40% break.
- A “wait and see” attitude on any payback or long-term lease negotiations.
The reason is simple. While taking legal action is possible in areas with no moratoria in place, it’s not always the best idea.
The Negative Impact of Legal Action
Every landlord knows of the costs of legal action in the case of an eviction, but these have been compounded by the COVID-19 crisis. For example:
- Even if an area does not have moratoria in place, there are legal and business grounds favoring the tenant in such cases.
- Legal arguments are changing based on moratoriums and circumstances, so even in a case the landlord might normally “win” there are no real assurances.
- Current trends are showing mortgage forbearance for landlords.
The costs of vacancy are even higher, and even in areas where commercial real estate may have been in high demand, in the current climate, the vacancy could continue indefinitely. That’s just loss of rent.
There are also legal costs including the new lease, property cleanup and improvement, incentive-driven free rent period, property tax, and even liability for activity on the premises.
If you are a business owner, what this means to you is that you won’t be evicted, or at least it’s highly unlikely. But it also means that if you don’t renegotiate your lease terms now, you may find yourself in a bad situation once the state of emergency has ended.
Lender Accommodations
The good news for tenants and landlords is that most banks are offering some kind of mortgage forbearance to commercial property owners. While they are not collecting rent or collecting smaller rent amounts, they may pay lower mortgage amounts.
However, this is entirely up to the lender, and the landlord may find themselves in a situation where they must at least attempt to collect rent on leases to prevent default on their part. Also, if a landlord has a building they are paying a mortgage on, they often have to get lender consent before changing lease terms.
As a business owner, it is important to understand that if your landlord is being a bit pig-headed about rent, it may not be their fault. They may have financial issues of their own, and clear communication might help you reach an agreement that works for both of you.
Tennant Negotiations
While many landlords are taking a “wait and see” approach to long term negotiations, there are things you can do as a tenant now. But how do you approach your landlord? This can be a tricky conversation to have, but here are some simple talking points.
- Talk about your investment in the property and any improvements you have made.
- Talk about trends before the pandemic and how your business stands to recover.
- Offer evidence of your current losses.
- Ask the landlord about their mortgage and ask about minimum base rent payments.
If you open your books and share information your landlord will be more likely to do the same. Be sure that you approach with an attitude of humility and not that of entitlement. Technically, you owe your landlord. They do not owe you and are not obligated to offer you any kind of deals outside your current contract.
At the same time, be sure to ask about the possibility of lease transference. If you do plan to sell your business at some point, you’ll need to have a plan in place (more on that in a moment).
What You Can Offer
Business owners, as tenants, can offer some things to the landlord that might incentivize them to take a different position regarding their lease. Approach the negotiations with a goal and what you could call the bottom line outcome, the worst outcome you can live with.
- Start with a desire for Free or Reduced Rent. Offer a bonus percentage if your business recovers faster and profits rebound. This is a part of sharing books and information with your landlord.
- Offer a 12-24 months Post COVID plan with similar terms. Restore rent to near normal rates with a discount. Offer bonuses for business performance and put accommodations in place in case of additional reductions in business or even closures.
The more open and clear you are with your landlord, and the better communication you can establish, the more likely you are to weather the current situation together, with a profitable final outcome for both of you.
Accommodations for Owner Transference
As mentioned above, this should be a part of any current lease negotiations. Depending on the length of the current crisis, and your ability to navigate the many coming changes, you may find it necessary to sell your business.
And your business success may be closely tied to your location. Having a clause in your lease that addresses this circumstance will help you in the negotiation process to sell your business. We often discuss here on our blog the need for lease negotiations when selling a business.
This may be more important now than ever. Whether your business is one that is thriving during this time, or you are one of the majority who is struggling, running your business as if it is for sale right now will help you with mindset, profit, spending, and cashflow.
Do you have questions about business valuation and what your business is really worth? Are you ready to start the process of selling your California business? Contact us today at Rogerson Business Services. We want to work with you and be your business broker here in California.
We look forward to hearing from you and hearing your thoughts.
