As we enter a new month with the rental landscape changed in dramatic ways by the coronavirus pandemic, landlords will undoubtedly be facing requests from tenants for rent relief. As you proceed to address these requests, some of the lessons from the last economic recession are applicable today.
Before you begin discussions, consider obtaining a pre-negotiation confidentiality email or letter. Emphasize that there is no deal until there is a written document executed by landlord and tenant. There should be no deal in the interim.
Consider the best way to document the relief if you can afford it. Obtain updated financial and operating statements (even if your lease does not necessarily provide for this). Evaluate whether you are entitled to or want to take the security deposit or draw on a letter of credit or other security.
If free or reduced rent is offered for a short period, consider if an equivalent extension of the lease term makes sense. Alternatively, consider a re-amortization of the relieved rent in later years of the lease. Consider charging interest on the amounts of free or reduced rent. Also consider recouping the free or reduced rent through profit sharing or percentage rent methods.
You should also look into whether you need your lenders’ approval for lease modifications. Typical loan considerations include, whether there is a debt to income ratio or other debt service coverage metric that could be triggered by the rent abatement, what financial information the lender may require from either you or the tenant, and whether other documentation is required under the loan documents.
Additional questions you should ask yourself:
- Do any current government orders potentially block this activity? For example, Wisconsin currently does not allow commencing eviction proceedings.
- If the tenant later defaults, can the rent relieved be included in a damages claim?
- Is there rent loss or business interruption insurance coverage that could be claimed?
- Is there a continuous operation provision that could be modified to achieve the rent relief?
Suggest to your tenant that they participate in any government assistance programs. You should have a list of the available programs to provide to the tenant. Do not assume they have this information.
Challenging economic conditions call for flexibility and speed. Be prepared to move quickly to resolve matters with your distressed tenants when they come calling. It will pay dividends in the future.
