Blog May 4, 2020

Commercial rent payments: Decision time for landlords and tenants

By Abe Somani

The month of May 2020 finds many commercial landlords and tenants stuck between a rock and a hard place. The need to mitigate business risk resulting from COVID-19 is front and center, and decisions regarding expenses, cashflow, and operating costs can no longer be delayed.

During April, many landlords and tenants were looking forward to receiving capital from government programs such as Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL), and they kept an eye on their respective state’s plans to reopen. Tenants behaved in a variety of ways during the month – some paid the rent, others asked for deferment, abatement, other agreed-upon options, or remained silent.

The month of May will bring tougher challenges and complexities. Many businesses will get their PPP/EIDL or figure out alternatives to ensure their own business continuity. They may still ask for forgiveness in May, but if their state has officially re-opened, their legal claim to abatement may be nonexistent, especially if they have received government funds. Will May 10th be a day of reckoning, as most rents will be due at the end of a 10-day grace period?

Leverage the lease to determine negotiation options

In terms of payments, the month of May represents a turning point where conversations between landlords and tenants begin in earnest. Landlords deal with delinquent tenants and decide whether to forgive, or send them packing. Tenants explore the types of protections they can receive based on their lease – if their state still allows them to utilize the space.

Landlords – If your tenants have not paid, you may need more insight on your lease terms to understand what rights you have during a negotiation.

Tenants – If you plan on asking for continued forgiveness or deferment, ensure that you’re in compliance with your lease. Understand your risk of getting kicked out, especially if your state has re-opened.

While both parties have different motivations and challenges, they have one thing in common: the lease is the governing document that forms the basis of negotiations and legal assertions.

Identify lease liabilities and exposure

Landlords and tenants need to review the lease thoroughly to determine liabilities and exposure. Before any legal work begins, important items in the lease need to be identified. These include, but are not limited to: condemnation, force majeure or act of god, SNDA, casualty, damage and destruction, co-tenancy and go-dark provisions, deprivation of services, late fees, notice of default & right to cure, beyond landlord’s control, constructive eviction, breach of covenant of quiet enjoyment, right to injunctive & equitable relief, and many more.

Uncover lease insights with smart OCR

Since time is of the essence, commercial landlords and tenants need to focus on evaluating their options and making decisions, instead of spending days reading through complex lease documents to find relevant clauses. Traditional lease abstraction involves manual search of key clauses across leases and other contracts, which takes up valuable time and has a high risk of error. MRI’s Lease Insights solution leverages smart optical character recognition (OCR) to quickly and accurately uncover lease data, identify key clauses, and save significant time.

At MRI, several of our clients are using Lease Insights to determine the best way forward for their business. Here are some negotiation options being offered by US landlords that use the solution:

1) Pay no rent for three to four months, and spread the accumulated balance out over the remaining life of the lease

2) Pay no rent for three to four months, and the accumulated balance is added on as a bullet payment at the end of the lease (last month)

3) No payment for three to four months, but the lease is extended by another 12 to 60 months at a rate that is higher than the usual rent

4) Pay a 50 percent reduction in rent for six months, with the remaining 50 percent spread out or tagged to back end

5) Enforcement of lease terms, drawing on security deposit or line of credit, and then terminating the lease

Ready to start using MRI’s smart Optical Character Recognition (OCR) technology to search key clauses across your portfolio of leases and other contracts? See how you can get started today.

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