Here are some rent relief negotiating tactics we recommend you follow during the COVID-19 outbreak and pandemic.
Step 1: Understand the potential impacts of COVID-19 will have on your business
- How much impact will there be to your ability to generate revenue?
- How much impact will there be to your supply chain?
- How long can your business reasonably be able to last with the current amount of revenue?
- What will be the long-term impacts to your business on revenue and profit?
This will help you build a numbers-driven case for your landlord to justify giving rent relief. It will also give you an idea of much rent relief you need (i.e. months of free or reduced rent).
Step 2: Understand your liabilities under the lease
- Are you personally guaranteeing the lease? If you, as an individual, are the Lessee or if you signed a Personal Guarantee addendum, then you are personally guaranteeing the lease. This means that you are personally liable for performing all obligations within the lease, including payment of rent for the rest of the term.
- Know your total monthly rent obligation, including base rent and any operating expense reimbursements.
- Are you up to date on rent payments as of March? Did you keep paying rent during the COVID-19 pandemic?
- How much security deposit have you given the landlord?
- Does your lease have a “force majeure” or “act of God” clause? If so, and you think it might contractually entitle your business to receive rent abatement during such circumstances, consult with an attorney. Work with your attorney to understand whether you are owed rent relief under this clause.
If you are personally guaranteeing your lease, the landlord can technically go after any personal assets you have including real estate, vehicles, banking accounts. Though this reduces that amount of leverage you have in rent relief negotiations, you should still follow the steps below. Just be aware that you will be backstopping the lease, should the impact of COVID-19 be permanent on your business.
Step 3: Be informed about local and state eviction moratoria
Both California (see here) and San Francisco (here) have passed eviction moratoria that do not permit evictions of small businesses for the duration of the Shelter-In-Place order. Review these in ordinances in depth. In general:
- The California ordinance prevents the landlord from evicting a small business for nonpayment of rent until May 31, 2020. After May 31, landlords can proceed with evictions.
- The San Francisco ordinance prevents landlords from evicting small businesses for nonpayment of rent from March 17 – November 30, 2020 [NOTE: this may be extended, check this link for updated info]. Evictions can only happen on the earlier of 1) the tenant no longer experiencing the financial impact of COVID-19 or 2) 6 months from date rent was due.
In both instances, you must provide financial proof of the impact that COVID-19 has had on your business. Also note that the measures above are only meant to buy businesses a short amount of time via deferring rent by a few months, at most. Thereafter, the landlord can pursue eviction if the outstanding payments are not received in full. It is better to memorialize a payment plan via lease amendment per the guidance in this article rather than relying on the eviction moratoria.
As of October 2020, we also started hearing manufacturers report landlords accepting to decrease rent throughout the pandemic: don’t forget that everything is negotiable and that it is in everyone’s best interest to keep businesses like yours going.
Step 4: Make contact with the landlord
Draft an email for your landlord allowing the following lines:
- It is better to be up front about what you are going through. Use concrete data (i.e how much your sales have fallen, etc)
- Ask for rent relief that will get you through the foreseeable future. This will mostly likely take the form of free or discounted rent. You can always go back to them if the current magnitude of the impact of COVID-19 lasts longer than you initially expected.
- Build a case reinforcing that the landlord is faced with a decision between: 1) A few months of rent abatement or 2) potentially losing you as a tenant and needing to incur downtime to re-lease the unit – lots of downtime, given the current circumstances.
- Be cordial, yet direct in your initial ask.
If your landlord rejects or ignores your request, give them a call.
Step 5: Negotiate the final terms of this agreement
The best likely outcome is to receive free rent for a few months initially, then discounted rent for the duration of the COVID-19 pandemic, with no other conditions.
If the landlord pushes back on the initial request, you can propose the following. Suggest these one at a time, going down the list until a deal is struck:
- Ask to be charged a percentage of your revenue (e.g. 10% of gross revenue made out of the rented location)
- Ask for a rent discount for the next few months, or ongoing throughout the pandemic.
- Give a few months of free or discounted rent, but add this unpaid rent to the back end of the term (e.g. 2 months of free rent immediately, make your remaining lease term 26 months instead of 24 months).
- Give a few months of free rent, and pay that free rent back over the remaining term.
Keep in mind that you are not alone in experiencing the unprecedented impact of COVID-19. The current leasing market is all but frozen at the moment, with no near-term end in sight. In general, landlords are willing to strike deals to help their tenants through the next few months, since the alternative is to incur leasing costs and downtime to re-lease the unit.
Step 6: Document the terms
Memorialize this agreement in writing and have both you and landlord sign off on this written agreement. Ideally, this will take the form of a lease amendment, but a lease letter where both parties sign could also be sufficient.
Any promised rent relief that is not documented in writing might not be adhered to, so this part is very important.
If you have any questions, please e-mail Pierre, Director or Advising & Education at SFMade.
Don’t forget to consult our main COVID-19 resource page for manufacturers.