By: Roseanne Hope, Hope Law, PLLC and Michelle Culligan, Culligan Legal & Business Counsel PLLC
March 31, 2020 Minneapolis, Minnesota
Collaboration, Communication, Resilience and Innovation are key to not only surviving this unprecedented time, but to being poised to thrive once the economy re-emerges from the current holding pattern. As attorneys with deep experience in commercial real estate and small business, we hosted a webinar on March 27, 2020 bringing together clients and leaders in the real estate and business community to share ideas and support each other. Information is empowering and we are encouraging others to share their successes and best practices. We are not specifically giving legal advice but are raising issues to consider and help you navigate through this uncharted territory. Of course, no one has the answer but together we can be the solution.
After talking to clients and colleagues, attending webinars, and reviewing the multitude of resources posted online, we wanted to provide a forum to share innovative ideas and resources. As you all know, things are changing every day, so it’s important to be nimble and proactive to survive the economic impact from the coronavirus outbreak. There’s no right plan for the future, but there are resources and best practices to aid your businesses to minimize the impact. Together, we can collaborate and help each other. So, we hope as you work to steady your business during this difficult time you’ll remember to:
- Be Resilient and Innovative — as leaders, we can be part of the solution. By being innovative, and taking advantage of available resources, we can minimize loss, prepare for uncertainty, stay resilient, strategize and take steps for recovery.
- Be Collaborative and Communicative – work together and tap into all of your resources and engage business partners, such as lenders, suppliers, financial advisors, brokers, accountants and attorneys. We are gathering people and information and trying to stay on top of all rapid developments. Work with your team to learn about the stimulus packages. All of us will feel some pain. Therefore, let’s collaborate– we are all in this together.
- Be Hopeful – the negative pull of pessimism and cynicism benefits no one, while the positivity of hope reaffirms and energizes. Or, in the words of Oprah and FDR respectively, “[t]he Power of Hope is Real and we can’t have both hope and fear” and “[T]he only thing to fear is fear itself.”
As we approach April 1st, rent abatement, deferral and concessions will become a big concern for tenants and landlords alike. Banks are expecting mortgage payments on April 1 and it is important to talk to your lender about restructure or forbearance. Many lenders are being proactive and this is a much different scenario from the Great Recession where the banks were experiencing financial trouble.
Even though one of the parties has a strong legal case, it can cost a lot of time and money to pursue it. Many courts are closed and there are backlogs so this will take a long time to resolve. Some jurisdictions have a freeze on evictions and government stimulus and loan deferrals may be contingent on compliance. The best solution is to work together.
We shared some Suggested Strategies and Solutions for Lease negotiations:
- Landlords: Be Proactive and Communicate. Landlords are calling tenants to offer help and keep communications open. It is important to keep tenants happy is there is not a lot of demand for vacant space today. STORE Capital sent out a memo to tenants and a link to an SBA lender and explanation of the program. In Florida, Publix waived rent and CAM for 2 months to tenants in the shopping centers that it owns. Make it easy for the tenants to respond to landlord’s expectations.
- Tenants: Be Proactive and Communicate. A tenant should articulate steps it is taking to lessen the impact. What is the cash flow and what government stimulus packages are available? Tenant should share its financials and give projections. Although this is very difficult and there is a lot of uncertainty, it is important to have the conversation. No one knows the answer and now is the time to be transparent.
- Example. An example rent negotiation could be for tenant to pay April rent, apply the security deposit to May rent and then revisit in June and defer or reduce rent thereafter.
- Discount. If Tenant pays April rent, give a 5% discount.
- Loan. Make a loan to Tenant and have them sign promissory note.
- Other Collateral. Check personal guaranties and other security. Landlord can ask to keep equipment when lease expires for restaurants as there is nominal value to the business at lease termination. A landlord may trade rent concessions for equipment as it is much easier to lease space with the equipment. However, the parties must consider leasehold financing and subordination with lenders.
- Options. Provide options—free rent can be amortized into rent or the lease can be extended to cover the free rent. It is important to work with brokers on extensions as it is hard to anticipate what the market rent will be.
- Due Date. Changing the due date to the 15th instead of 1st for a few months may help tenants with cashflow.
- Confidentiality. Each negotiation should be kept confidential. All tenants are different and should be considered on a case by case basis.
- Subleasing. Be flexible on subleasing. Perhaps grocery stores want to expand?
- Be Creative. Think outside the box. Some landlords have helped tenants learn how to promote their business by sending out promotions and assisting in curbside pick up. Employees can park in front of a building to make the parking lot look more full and show they are open.
- Work with the franchisor. What are franchisors doing? Ask? One landlord gave rent abatement for mom and pop and a match for franchisees if franchisor matched. Also some franchisors are providing counseling for franchisees.
- Talk to Lender. Remember a lease modification can require lender consent.
- Review Force Majeure Provisions. Who and what does it cover? What is definition? pandemics, quarantine, public health emergency? Act of God? Broad anything beyond reasonable control? Government restrictions, supply chain. Some big box tenants have used force majeure to close stores and stop paying rent.
We can be critical thinkers and brainstorm with each other. There are a lot of solutions and strategies that all parties need to consider and all options are on the table. It is important to work with your lawyer to ensure the lease modification covers all points and that you have reviewed all terms of your lease. It is also important to work with your broker to negotiate the right deal. Build your team and gather as much info as you can. Talk to your insurance agent, banker, broker, lawyer, accountants, architects, engineers and contractors. It takes a village. Collaboration and Communication is the way we will survive and thrive.