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The shutdown of our economy has crippled many companies in New Jersey. Tenants who are operating businesses that have been negatively impacted need help if they will be able to continue now and after the stay-at-home orders are lifted. Even businesses who receive government assistance may very well need financial help to remain viable.
Many measures can be taken without professional assistance. This includes operational changes, employee staff changes, inventory control changes, and changes external to the business such as advertising purchases. On the other hand, some changes may require professional assistance from lawyers, accountants, bankers, and insurance professionals.
What follows are a list of important changes that tenants with financial hardship should explore now. This list is not exhaustive, and its applicability is far from universal, but perhaps it’s a good place to start.
Tenants in trouble are never all alone. If a tenant is financially impacted, it may not be able to continue making rental payments, which means the tenant’s landlord may be in trouble as well. If the landlord is facing financial hardship that means it may not be able to remain current on its mortgage obligations, thereby impacting the lender. When one party is impacted, many face resulting difficulties. In this climate, every party may have an incentive to discuss a lease renegotiation or restructuring.
There are as many ways to renegotiate a lease as there are to draft an original lease. In other words, anything can be renegotiated. Of course, the first thing that everyone will look at is the monthly rental amount. Perhaps rent can be reduced or several months of low or no rental payments can be negotiated, which can provide a distressed tenant with fairly immediate relief.
The landlord’s willingness to make rent concessions depends on the landlord’s strength and whether the landlord has other, perhaps better options. If rent is forgiven during the current crisis, perhaps it will be forgiven outright or perhaps it will be tacked onto the end of the lease term.
Lease restructuring might also mean renting less space than before. Many companies have reevaluated the amount of space they now require, especially after they have learned during this shutdown that work at home options and office sharing arrangements can work very well and save a lot of money.
Maybe the tenant now has less employees as a result of current business conditions and no longer needs as much space. Possibly the tenant is an industrial operation whose space needs have changed due to market demand for its product.
The amount of rent is the most obvious lease renegotiation issue. The amount of space being rented is also a common renegotiation issue as is the term of the lease and the availability of lease renewals. However, complex commercial leases have many provisions and anything can be raised in a renegotiation proposal. By no means does it mean that in fact everything will be successfully renegotiated. But as they say, it never hurts to ask. One thing that is certain is that a tenant will not secure a lease renegotiation on a term that has not been proposed during these discussions.
Subleasing is another option for a tenant who needs immediate financial relief. Although this may take longer than a restructuring, this might make most sense when a landlord is not willing to revisit the terms of the existing lease. Most well written leases have provisions addressing subleasing with some allowing subleasing, some not allowing them at all, and some requiring subleasing with express landlord approval.
Often subleasing will mean that the rental property will be subleased at a loss to the tenant, but at least overall might bring in enough cash to rescue a troubled tenant’s business operations. Keep in mind that a tenant will still be fully liable to the landlord when there is a sublease. The purpose of the sublease is to bring in some cash but may very well not fully makeup what a tenant is responsible for under the primary lease.
Another option for a tenant facing COVID-19 caused financial problems might involve a lease buyout. This is a potentially more costly option for a tenant because the tenant and landlord must look at the total projected revenue that would have been generated throughout the lease term, and determine a suitable buyout figure in part based on these projections for early lease termination.
This may be a less desirable option because it will take some time to negotiate such an agreement and the distressed tenant may not have that much time. Also, due to the nature of this agreement and what it represents, it may be the most costly option. Nonetheless a buyout may be a viable option and given the particular circumstances it may make the most sense.
This is a difficult subject at times such as this but another source of revenue are past due accounts. Here, lawyers can work with impacted companies to develop strategies for collecting on these receivables including sending demand letters in the form required under federal law, negotiations with delinquent parties and preparation of releases, and ultimately commencing litigation as a very last resort.
As a final measure, many tenants experiencing problems are regulated by the government to one extent or another. There are almost countless examples, but one that comes to mind are tenants under some kind of environmental regulations. This might include a mandatory cleanup order or permitting obligations. Many agencies are demonstrating a willingness to relax some of these obligations while this crisis is underway. This involves prompt discussions with the regulator to avoid penalty exposure.
At the end of the day, tenants have many options available for addressing this temporary hardship caused by the coronavirus. Some are easier to accomplish and can be done without professional assistance. Others might require help from a lawyer, accountant, real estate professional, or other germane professional depending on the specific needs. The key is this: many options are available but do take time. Starting the process as early as possible might yield the best possible result under the circumstances.
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