10 Lease Renegotiation Best Practices
We polled our experts about what they’ve learned so far about lease renegotiations during the COVID crisis. Here are their top 10 takeaways:
1. Importance of Tenant Communication: Landlords were more likely to grant concessions to tenants that were able to clearly articulate their COVID-19 financial hardships.
2. Importance of Tenant Financial Statements: One of the most effective ways for a tenant to secure concessions and gain landlords’ trust was to provide financials demonstrating their COVID-19 losses and the strength of their core business.
3. Forbearance vs. Forgiveness Flexibility: In many cases, the question of rent forbearance vs. rent forgiveness wasn’t an either-or but a hybrid of both—for example, 50 percent rent abatement in April and 100 percent deferral of May rent until December.
4. Givebacks for Rent Relief: In return for rent relief, many tenants were willing to make strict compliance with future repayment of deferred rent a condition for renewal, first refusal, improvements, and other lease rights. Other common givebacks traded for rent breaks included:
- The narrowing of exclusives, such as removal of the exclusive right to sell certain items;
- Stricter continuous operations requirements, such as the requirement to have an online presence or provide deliveries to customers; and
- Loosening of co-tenancy protections.
5. Cross Default Strategies: Some landlords traded concessions on one lease for givebacks on other leases between the parties at different locations—for example, rent abatements for financially strapped New York tenants in exchange for rent increases on their more prosperous Texas locations. In addition, landlords introduced “cross default” clauses in their leases to give them greater security by providing that if the tenant is in default under one lease it would also be deemed in default under other leases with that landlord.
6. PPP Facilitates Agreement: A key concession demanded by landlords and agreeable to most tenants was the tenant’s agreement to seek federal Paycheck Program Protection (PPP) payments and promise to use the rental portion of the proceeds to pay or repay the landlord.
7. Business Interruption Insurance Didn’t Help: Similar concessions relating to business interruption insurance proceeds were far less frequent due to how few tenants actually had business interruption policies covering their COVID-19 losses (mostly because COVID-19 losses weren’t deemed a covered loss under the policy).
8. Security Deposit Substitutes: Even where permitted by law, landlords were generally reluctant to draw on security deposits to cover a tenant’s rent arrears, especially in April when it was unclear how long the COVID-19 disaster would last. In many cases, the sides worked around the problem by having the tenant provide alternative security such as personal or corporate guarantees or letters of credit.
9. Landlords Stand Firm on Operating Expenses: While landlords showed flexibility on basic rent, they generally insisted that tenants continue to pay their share of operating expenses, in many cases at the pre-COVID-19 rate even though tenants strongly suspected that the shutdown of nonessential businesses caused operating expenses to decline. And while most tenants lacked the leverage and lease language to demand givebacks or perform audits, they’re likely to demand greater operating expense restrictions and transparency in the next round of lease negotiations.
10. Landlord Demand for Longer Lease Terms: One pattern that is likely to continue long into the post-COVID-19 era is the greater willingness of landlords to prioritize security and offer lower rents for longer lease terms.