There is no one magic solution for any commercial landlord or tenant – each situation is as unique as the real estate it rests on. Therefore, careful examination of each party’s position is important.
Tenants need to understand that the landlord:
- May have debt on the property requiring monthly loan payments that require all tenants to pay rent;
- Has other operating expenses to pay, including property taxes, insurance, utilities, security and maintenance, which, when unpaid, may have significant impacts to the property;
- May rely on the property cash flow as his/her primary income.
Landlords need to understand that tenants:
- May have little or no emergency funds or cash resources to re-open or pay;Have no idea if their customers will come back 100 percent or if their customer base still exists;
- May have to re-open at 25 percent capacity but with 20-40 percent more costs due to COVID-19 requirements;
- May not be ready to commit more liability in the form of an additional renewed term because they don’t see a future;
- May or may not have received a forgivable federal PPP loan or other financial assistance or debt relief;
- May be considering bankruptcy and
- May not be able to handle any rent increases or to repay a rent deferral for many years – if at all.
Further, given the number of businesses unsure of whether to open at all, the pool of possible new tenants to fill any vacancy is thin. The cost of re-tenanting a space with vacancy loss, broker fees and possible improvements is significant.
For these reasons, commercial landlords and tenants should both recognize that this is a crisis of nobody’s causing. On this basis, they need to work with each other to absorb some of the loss associated with the crisis as, simply, a risk of operating a business and owning real estate – and meet in the middle.
There will be some financial pain on both sides of the lease transaction, and neither party should expect that things will be the same as before given the current economic impacts. Agreements regarding such accommodations should be in writing.
There will be many economic casualties in this crisis due to undercapitalized businesses, failed business models, new ways of doing business in the COVID-19 era, and high leverage or expenses. The commercial landlord and tenant must start working together now to recognize the issues and find a path to sustainable survival for both parties.