Ways to Restructure CRE Leases in the COVID-19 Era

In this article, you'll learn:

• How rent abatements can offer temporary relief by reducing or waiving rent.
• The advantages of rent deferrals, letting you pay rent later to conserve cash now.
• Lease extensions as a way to secure abatements by extending your stay.
• Creative options like percentage rent or additional guarantees for more flexibility.

Whether or not COVID-19 meets the legal standard necessary to trigger the force majeure clause in your lease, from a layperson's perspective, it's about as big of a force majeure as anyone can imagine. With the economy in the midst of a major slowdown, businesses seek ways to cut expenses. Given that payroll costs are either being cut by furloughs or covered through promised government assistance programs like the Paycheck Protection Program, a commercial real estate lease restructure represents the next opportunity for cost cutting. Although most leases are binding contracts with little room for adjustment, the realities of the situation under COVID-19 is that many landlords are willing to work with their tenants. Here are some of the broad ways that tenants can restructure commercial real estate leases:

Rent Abatements

From a tenant's perspective, the perfect solution would be to get a rent abatement and simply not pay any rent for a while. While some landlords may offer this option, your rent abatement may also be split between your rent and your common area maintenance costs, requiring you to pay the building's operating costs while the landlord absorbs your unpaid rent.

Rent Deferrals

If your goal is to restructure your commercial real estate lease to conserve near-term cash, a rent deferral might be a strategy to consider. With a deferral, you pay no rent (or pay CAM only), with the understanding that you will pay the unpaid balance back over time. For instance, if you defer $10,000 in rental expense over two months, the landlord will add $1,000 per month to your rent for the following ten months.  This way, you save money now when you really need to conserve cash, and your landlord gets the full value out of your lease.

Lease Extensions

If your landlord will allow it, you might be able to combine an abatement with a deferral of a sort by negotiating a lease extension. Under this structure, you get a rent abatement for a period of time in exchange for adding the same amount of time to the back end of your lease, extending your stay in your space. This structure is particularly advantageous when your intent is to renew your lease, anyways. As with the abatement and deferral option, the landlord might still ask you to pay your CAM while you occupy the space during this COVID-19 crisis.

Creative Solutions

Beyond waiving or extending your rent, your landlord could get creative. They could convert your lease to a percentage rent, letting you save money while your sales are reduced (or non-existing), but having you pay more when your business recovers. Your landlord might simply let you out of your lease, or offer you additional money to defray capital expenditures. On the other hand, in exchange for letting you restructure your commercial real estate lease, they might ask you for an additional personal or corporate guarantee to secure the rest of your lease after the concession period.

Preparing to Restructure your Commercial Real Estate Lease

As you can tell, a commercial real estate lease restructure can make just about any form that you can negotiate -- providing that your landlord is amenable. To maximize your results in the process and to protect your interests, it's important to build a team with at least two professionals. First, seek the advice of a qualified real estate attorney who can help you understand your rights under your current lease and help negotiate the legal details of any restructure. Second, work closely with your tenant representative. His or her expertise in current market conditions, understanding of your needs, and negotiating skill will help you restructure your commercial real estate lease with the most favorable terms possible.