April 28, 2021, by HOCO CRE
Renewing and Renegotiating Commercial Lease Amid Covid-19
The Covid-19 pandemic has presented an unprecedented and uniquely challenging time for commercial tenants and landlords with the imposition of government restrictions and social distancing guidelines. However, as restrictions loosen and companies send their employees back to work, Commercial tenants could see large savings through renegotiating their leases. In the following, we discuss things for commercial tenants to consider when renewing and renegotiating their leases.
Lease Term Survey
Practical Guidance recently conducted a survey of commercial lease terms to study the trends of lease modifications amidst Covid-19. The data set referenced included 299 recently negotiated commercial leases obtained from private sources. These leases are spread across the country, with 26% located in the northeast, 26% in the west, 24% in the southeast, 11% in the southwest, and 11% in the midwest.
The survey specifically studied the commercial real estate market and the pandemic’s impact on real estate attorneys’ lease negotiations. The survey found that landlords and tenants have been engaging in collaborative efforts with one another to reach agreements that enable tenants to remain in a space and ensure that landlords receive reasonable payments. This data set is encouraging for tenants who need relief as it suggests they have added leverage for lease renewals and renegotiations.
Reset Base Year The base year is established to protect the landlord from increases in operating expenses and is based on the landlords expenses in the tenant’s first year of the lease.
Resetting the base year to the landlords current operating expenses can result in significant savings for the tenant moving forward.
Subletting
Now may be the time to negotiate more lenient subletting provisions into your commercial lease. Subletting provisions allow tenants to substitute a new tenant into a commercial space if they wish to vacate the premises or can no longer make rent payments. Keep in mind that the original tenant remains legally responsible for all rental payments in the event a subtenant fails to pay. However, having these provisions in your lease can be a great safeguard.
Security Deposits
If your business is suffering due to the pandemic, you may consider negotiating the deposit of a covid-related security deposit or ask to have current deposit funds put towards past or future rent payments. If you are a tenant and have sufficient cash, you may consider putting down a special pandemic security deposit for future rent payments if you anticipate future cash flow problems related to the imposition of government restrictions.
Conversely, if you are a tenant who is currently struggling and you are up for a lease renewal, you may negotiate with your landlord to put security deposit funds that you have on file towards present or owed rent payments.
Saving Money While Renewing
Commercial real estate trends suggest that tenants have added leverage this year while renewing and renegotiating their leases. Tenants should become informed and know their options before sitting down at the negotiating table when it’s time to renew.
Take The Guesswork Out Of What Is Available
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[1] Practical Guidance, Survey of Commercial Lease Terms Reveals Ongoing COVID-19 Implications, https://plus.lexis.com/api/permalink/b191db19-85e5-4d54-96b7-f4fa24f7126c/?context=1530671 ,(current as of March 12,2021)