Renegotiating a Commercial Lease in Todays Market - Landlords and Their Struggling Tenants

Today's recession means that tenants are struggling to survive. To that end, many tenants are seeking to renegotiate their leases as a means to further cut costs. However, landlords are under increasing pressure to protect their rents and maintain occupancy in properties due to impending mortgage payments, property taxes, insurance and other carrying costs. Each party should take steps to protect themselves now and in the future. The landlord and tenant should be prepared with information on current market conditions and the state of the tenant's business before entering into renegotiations. Both parties should be interested in the current financial state of the tenant's business, what cutbacks and cost savings have already been implemented, and how much more needs to be cut to survive the current economy. A review of these factors will lead to an effective negotiation between the parties.

Landlords can offer several devices to relieve current economic pressures on Tenants:

a. Rent abatement up to six months, which is added to the end of the lease as a lump sum or amortized over last year of the lease.

b. A reduction in monthly rent amounts.

c. Permitting a temporary change in the base year for operating expenses / utilities or a landlord credit towards utilities for the current year.

d. A Temporary abatement in common area charges.

e. Additional signage or extra parking free of charge to assist in attracting new or more customers/clients.

f. Performing repairs or improvements to the premises to make them more inviting to customer/clients, including landscaping.

g. Constructing additional tenant improvements to update the current business location.

h. Permitting the tenant to sublet a portion or the entire unit with approval.

As an overall device, Landlords should consider investing in going "green" to retain current tenants and attract future ones. Going green is a current trend of protecting the environment, but it also involves making a building efficient in use of utilities. A highly efficient building can make the difference for tenants in determining what they can afford to pay in rent.

In return for rent abatement or a permanent reduction of rent, landlords would be wise to ask for a few things of the tenant:

a. Longer/extended rent term tied to CPI Index, or step-up every year in rent

b. Waivers of first rights of refusal, options to expand or purchase, and exclusive use provisions

c. Relocation clause (especially if permanent reduction in rent).

d. Unilateral renegotiation rights for landlord in five years.

e. Waiver of co-tenancy requirements.

f. Personal guarantees on part of tenant and/or tenant's parent company.

g. Estoppel certificate waiving any landlord defaults.

h. Forfeiture of any early termination right.

Alternatively, for struggling tenants, this is the time to seek renegotiation with the Landlord. Before approaching this process, tenants should ensure their financial house is in order - needed cuts and staff reductions have been made, and the business is "lean and mean." Tenants will need to demonstrate this to the Landlord. In addition to the devices listed above for Landlords, Tenants should attempt to seek:

a. Short term, low rent lease.

b. Contraction option to reduce space if needed.

c. Expanding use clauses.