In the past six months, as the result of the coronavirus pandemic and mandated state shutdowns, many California businesses really are struggling. Hundreds of businesses have shut their doors. Others are trying to survive with much less revenue coming in. Some of the California industries hit hardest because of the COVID-19 crisis have been retailers, full-service restaurants and arts and entertainment businesses and venues.
For commercial landlords, the economic crisis has made it difficult for many affected businesses to pay rent. As a result, landlords face difficulties paying their mortgages. What should you do when you know your commercial tenants may face months of not being able to pay rent?
Here are three steps landlords in that situation can take:
- Seek help from professionals. You may want to try to avoid having to incur legal fees and other costs when dealing with a commercial tenant who can’t pay rent. However, often it is better to get professional help sooner rather than later. You will have more options when negotiating with your tenants and get assistance to evaluate your financial projections in the current economic client. You should at minimum consult with a real estate attorney and accountant to evaluate what your next steps should be.
- Evaluate your obligations, resources and options. You need to gather as much information as you can before you negotiate with your tenant. You’ll want to gather your loan documents, your recurring expenses, your insurance policies and the documents that support your tenant’s request for rent relief. You also may want to get a pre-negotiation agreement in place, to formally set out that your current lease agreement remains in place for now and your negotiations with your tenant need to stay confidential. Finally, you’ll need to evaluate your financial resources, your financial and contractual obligations, and your tenant’s contractual rights.
- Find creative solutions with your lender and tenant. Perhaps, you can negotiate partial rent payments with your tenant for a period of time. Or you could renegotiate the lease (perhaps shortening the term or reducing the amount of space your tenant occupies) or buy out the lease. No matter what agreement you come to with your tenant, you need to have that documented, ensuring your attorney has reviewed the new commercial lease agreement.
The economy already has begun recovering from business shutdowns last spring. However, you want to be proactive about protecting your interests and negotiating with your commercial tenants if they can’t pay their rent. Taking control of the situation early on will help you find a solution that hopefully will be beneficial to you and your tenant.