3 Common Forms of Rent Relief
As a commercial tenant, one of your most substantial recurring expenses is your rent. Every tenant enters a lease intending to honour the business terms of the agreement, but business circumstances can change. In the case of the COVID-19 pandemic, things have changed overnight. Although some tenants have been able to receive rent assistance through CECRA, many tenants don’t qualify, and even if they do, some landlords are not participating in government programs.
When times are tough, your commercial lease doesn’t have to force your business into financial distress. Your landlord may agree to provide some form of rent relief until your circumstances improve. It’s not good for you or your landlord if you are forced to walk away from your space.
Think of the costs your landlord will incur if you break your lease; they will have legal fees, will be without any rent while your space is vacant, and will have to market the space for lease. Then your landlord will have to pay broker commissions for a new lease, pay legal fees for the negotiation of the new lease, provide the new tenant with a leasehold improvement allowance, and potentially complete ‘landlord work’ (demolition of existing improvements, new demising walls, etc.). As a result, it can be in your landlord’s best interest to provide rent relief when times are tough for a tenant.
3 General Forms of Rent Relief
1. Rent Abatement
Abated rent is essentially a free rent period, negotiated with your landlord, to help you manage your cashflow.
More often than not, when a landlord agrees to abate rent, the free rent will apply to your Net Rent, and you’ll still be required to pay your additional rent / operating expenses.
2. Rent Deferral
Unlike abated rent, rent deferral means that you pay reduced rent for a period of time with the understanding that the deferred amount is paid back, in full, at a later date.
In Ottawa, it has been far more common for landlords to agree to deferred rent than abated rent.
Assuming that rent abatement is not an option, rent deferral can be attractive to tenants because you don’t typically have to extend your lease. The deferred rent amount is applied to future rent payments. The ‘payback’ of the deferred rent can be structured as a lump sum, amortized over a set period of months, or repaid over the remaining term of your lease.
For example, if your monthly Net Rent is $10,000, and your landlord agrees to defer your rent for three months, you will have to pay back $30,000 of rent. If you have eighteen months remaining on your lease after the deferred rent period, and you agree to repay the deferred rent over the remaining term of your lease, you would have to pay back an extra $1,667 per month for the remainder of your lease term ($30,000 / 18 months = $1,667 per month).
Although some landlords will agree to rent deferral repayment over an extended time, most won’t be willing to wait for complete reimbursement beyond a couple of years. So, if you have three or more years remaining on your lease, don’t be surprised if your landlord is not willing to spread out the balance owing over the remainder of the lease term. Also, many landlords will apply interest to the rent payback calculation.
3. Lease Restructure
As its name implies, when you restructure your lease, you agree to make changes to the business terms and/or clauses in your lease to benefit both you and your landlord.
Typically, when leases are restructured, the landlord agrees to provide a concession, like reduced rent, in exchange for an extended lease term commitment. Often, these arrangements are referred to as ‘blend-and-extend’ negotiations. As such, the terms of your existing agreement are blended with the new business terms of the extended agreement. In exchange for an extended lease term, landlord concessions could include reduced rent, free rent, or a leasehold improvement allowance.
For example, if you have two years remaining on your lease, your landlord could agree to reduce your present net rent by a couple of dollars per sq. ft. for the next three years in exchange for extending the current term of your lease for another five years.
Given the current uncertainty, a blend-and-extend can be a great win-win for you and your landlord. It is important to remember, though, that extending your present lease term may be far less appealing to your landlord if the expiry date of your lease term is more than a couple of years away.
Important Points to Remember
Ultimately, if the initial conversation is approached collaboratively, it’s really in everyone’s best interest to work together on a mutually beneficial solution. That being said, there are a few important points to consider before you approach your landlord about rent relief:
Know Your Commitment – Before you schedule a meeting with your landlord, review your lease, so you know your financial commitment, length of lease term, expansion and termination options, and default provision.
Prepare Your Documents – Before agreeing to rent relief, most Ottawa landlords will want to have a clear understanding of your current financial position and how you are planning to turn things around. It is not uncommon to be asked for audited financial statements, year-to-date sales, and a business plan that outlines your path back to profitability.
Bank Approval May be Required – Your landlord will have debt on their building, and they may require their lender’s approval to make changes to your rent or your lease. As such, it may take time for your landlord to agree to, and provide you with rent relief.
For additional questions about rent relief, restructuring your current lease, and present market conditions, please email me at firstname.lastname@example.org