When circumstances have changed and you can’t pay your commercial real estate landlord

For most businesses, rent is expense. If your company has been closed to prevent the spread of COVID-19, you may no longer be able to make rent payments. Does this mean the end of your business?

Not necessarily. Commercial leases are contracts, and under the right circumstances  may often be renegotiated.

If your business is fundamentally sound but you’re not operating at the moment, you can try to negotiate a lease amendment with your landlord. The types of changes that may be available include, for example:

A forbearance — an agreed-upon period of time where your landlord won’t move to evict you because you’re not making rent payments. For example, you wouldn’t have to pay rent for two or three months, although the unpaid rent generally must be paid later.

Reduction in rent — if there is an argument that your rent now exceeds the market rate, you may be eligible for a rent reduction.

Reduction in space — If you think your business needs to scale back for a time, you may need less space than you previously used.

Change in penalties — If you can make up the rent you’ve missed but can’t afford the penalties in your current lease, you could renegotiate those penalties.

Subletting or transferal of the lease — If you have significant time left on your lease, you might consider subletting to a tenant who is able to pay the rent.

Why would my landlord agree to renegotiate?

There are costs associated with losing a tenant. For example, landlords typically have expenses when searching for a new, qualified tenant who can pay what you’re paying. That will likely be even harder in today’s market. If you leave, the storefront becomes empty and might not produce income at all — but the landlord’s expenses stay much the same.

Especially in tough market conditions, it is often best for everyone if the landlord can give a little. It keeps your company in place as a tenant, which can maximize profits long-term.

Considerations in renegotiating a lease

Put together a proposal. Understand your current lease and market conditions. Can you show how the landlord will benefit from working with you?

To leave room for negotiation, your first proposal should include a 5% to 10% “cushion” for the bottom line amount of rent you are willing to pay. You don’t have to  go through this process alone. Working with an attorney who knows the local market can help you make a convincing case to your landlord  for the necessary relief.