All information in this COVID-19 Response Resource issue is effective as of April 21, 2020.
Companies that have real property leases are being forced to quickly navigate the impacts of the COVID-19 pandemic and the shutdown orders that have in many cases closed their businesses or otherwise severally reduced their revenue. When considering their options for necessary rent relief arising as a result of significant liquidity and working capital decreases, tenants must be proactive and reach out to their landlords and other creditors (collectively referred to as “landlords”) with a restructure business plan that will give their landlords confidence that the tenant will be able to survive the crisis. Tenants should further plan to give clear reasons why the landlord should want to work with the tenant and give the tenant the rent relief needed to survive.
A tenant faced with these challenges needs to consider its available options for relief, including, among others, forbearance on paying rent for a period of time (90 to 120 days), reduced rent, deferred rent rolled into the end of the lease, early termination of the lease, space reduction, or, as a last resort, breaching the lease or filing bankruptcy.
Finally, tenants must be prepared to provide supporting financial information to their landlords, including cash flow forecasts, in order to demonstrate a detailed reorganization plan specific to the tenant’s situation that will allow the landlord to make an informed decision about the tenant’s reorganization plan. Tenants must open a clear line of communication with the landlord to ensure that the landlord understands the specific, unique situation of the tenant and how the tenant plans to work out of the crisis. Also, the tenant must understand the landlord’s position and limitations in restructuring the lease.
Some common options available to tenants for rent relief are as follows:
1. Forbearance of Rent, Rent Reduction or Rent Deferment
The tenant’s proposal to the landlord may include a request for a 90- to 120-day forbearance of rent. Typically, this type of forbearance means that, at the end of the forbearance period, the full amount of the rent that accumulated during the forbearance period becomes due. As part of the forbearance, the tenant may need to propose how the rent forbearance will be repaid. For example, if the tenant received a 90-day forbearance, the tenant may propose to pay the forbearance rent over time in additional monthly payments of six to 12 months beginning at the end of the forbearance period. These monthly payments would be in addition to the regular monthly rent payment that would begin after the forbearance period.
The tenant’s proposal to the landlord may include a reduction of rent or deferment of the rent for a period of time, with the deferred rent being rolled into the end of the lease as either a balloon payment, extension of the lease or a catch-up payment plan (similar to that mentioned above).
The tenant’s proposal should also address the payment of, and the responsibility for, CAM charges, utilities, taxes and insurance. Tenants should be prepared to pay a fee or some type of interest component for the rent relief granted by the landlord.
In all cases, a tenant’s proposal should be supported by a cash flow forecast, including options to show the landlord how both the tenant and the landlord can recover after the crisis. These options can include extending the term of the lease; adding interest on unpaid amounts; and structuring a new lease.
2. Modification of Lease Term or Premises
The tenant may seek to modify its lease term or its leased premises. Each tenant must consider the specific facts of its situation. If the lease expires soon, consider vacating early and surrendering the leased premises to the landlord. If not, and the business is still operating at a reduced capacity, consider implementing a strategic change such as a space consolidation and giving back a portion of the leased premises to the landlord or subletting a portion of the leased premises.
Tenants and landlords should continue to watch for evolving government assistance programs as well as reviewing credit agreements and insurance policies. If government assistance is available, the landlord will expect the tenant to pursue and pay rent with government assistance. The tenant should keep detailed records of any information prepared to negotiate the change and review all expenses and cash flow opportunities to demonstrate a fully developed reorganization plan. This plan should include a specific ask, and tenants should anticipate the landlord to also ask for additional information, including tax returns; historical financial statements; and other financial reports to support the impact to the tenant’s business.
3. Tenant Stops Paying Rent
The tenant may elect to stop paying rent. This option is extremely risky to the tenant and generally not recommended as it has less certain of an outcome from the landlord and will likely expose the tenant to damages for its breach; although there are extenuating circumstances when this is the only possible action, and there may be instances where a breach is strategically beneficial.
4. Bankruptcy
Generally, as a last resort, a tenant may need to file a Chapter 11 bankruptcy (or Subchapter V if the company is a small business having total debt of less than $7.5M) to keep the landlord from evicting the tenant and terminating the lease. A bankruptcy filing will keep the landlord at bay until the tenant can formulate a plan of reorganization. During the bankruptcy, the tenant does not need to pay the prebankruptcy rent but will need to pay the post-bankruptcy rent in the ordinary course as required by the lease. In a bankruptcy, while a tenant can typically either assume or reject the lease, they cannot force the landlord to accept new terms. If the tenant assumes the lease, the tenant will need to cure all defaults, including paying the prepetition rent that is owed.
Parsons Behle & Latimer can help your company formulate a rent relief strategy and negotiate with your landlord. To learn more, contact Bruce White at (801) 536-6801 or send an email to bwhite@parsonsbehle.com, Bryan Elwood by calling (801) 536-6781 or send an email to belwood@parsonsbehle.com or Jason Nichols at (801) 536-6907 or send an email to jnichols@parsonsbehle.com.
