Reetu Gupta’s timing could hardly have been worse. In early February, she moved four of her 10 employees out of a co-working space and into a private office in Bellevue, Washington. Her company, Cirkled In, makes a technology platform to link college recruiters with desirable high school students. Cirkled In started generating revenue at the end of 2019, and Gupta leased the cheapest space she could find, at $575 a month. She hired three salespeople, trained them, and had them ready to go on March 9.
A week later, “everything came to a screeching halt,” she says. “At first, we thought maybe the shelter-in-place order will only last a week or two. I let my salespeople go, thinking they’d be back in two weeks. I was so wrong.”
And hardly alone. Gupta says colleges and universities are still interested in her platform, partly because the plans of so many high school seniors are suddenly up in the air. But universities are also facing financial pressure as parents demand refunds for semesters completed online. Gupta still can’t work at her office. She asked for relief but the management company offered to defer her rent only until the end of May. “For some companies, deferral may be fine, but for me it is not,” she says. “I don’t want debt. I don’t want the sword of the landlord hanging over my head.”
For many businesses, rent is the second-biggest expense after payroll. But it may now be the biggest problem. By enabling states to offer more generous unemployment benefits, and by enacting a variety of loan programs for small businesses, the federal government has tried to help business owners meet payroll. There’s been less assistance with rent. Businesses that get a loan from the Paycheck Protection Program can use up to 25 percent of it on rent, but that loan amount is limited to 2.5 months’ of payroll.
With June approaching, what should you do if you can no longer pay your rent? “My best advice to everybody is to play nice in the sandbox,” says J.V. Anderton, a shareholder at law firm Loomis, Ewert, Parsley, Davis & Gotting, in Lansing, Michigan. “You want to be fair and forthright with the other side and say, this is what I can do, and this is what I’m hoping you can do for me.”
Generally, you should pay what you can, says Lenore Horton, a partner in the New York offices of law firm FisherBroyles, and keep your landlord or management company updated. If, over time, you’ll be able to catch up on the rent, Horton says that shouldn’t be a huge problem. “You just work out a payment schedule.”
If you don’t think you can catch up, you may have more leverage than you might imagine. In most places, says Anderton, a landlord is going to have to go in front of a judge to evict you. With many courts closed except for emergencies, that’s not going to be easy. Judges are supposed to enforce contracts such as leases, but “if the landlord comes off as being a jerk, a judge is going to rein that in,” says Anderton. “It’s not behavior that judges are particularly fond of, period.” States such as New York and Rhode Island have provided even more protection by also extending temporary residential eviction bans to commercial leases.
If you are a good tenant who paid reliably before the coronavirus, that will help your case. No landlord wants vacant space. Not only is there the immediate loss of income, but vacancies decrease the value of the entire building as well, says Larry Drath, a Score mentor and former real estate attorney based in New York City. “They are not looking to throw tenants out. And they’re not going to find any new tenants.”
Of course, landlords may have their own mortgages to pay. They may need approval from their lenders before modifying leases, and those banks don’t always have a lot of leeway from regulators in dealing with borrowers such as landlords. It’s still worth trying to negotiate, though.
Retailers or other businesses that have been shuttered should ask for complete rent forgiveness for the duration of the pandemic, or “until the all-clear whistle goes off and you can return to work,” says Drath. Failing that, ask for a steep discount until you can reopen. Any amount that you owe should be payable over an extended period of time. You don’t want to reopen and suddenly be facing a huge bill for deferred rent. You could pay in 12 monthly installments beginning six months after you reopen, for example.
If your business hasn’t been as hard hit, but you still need help, the principle is the same: You want some reduction, and you don’t want to be faced with a huge rent bill the minute you are able to resume a normal level of business.
Another option is to ask for any unpaid rent to be tacked onto the end of your lease, extending it for another few months. Or you could make some immediate rent relief part of your negotiation to renew your lease. You could also ask to pay some percentage of your revenue as rent.
Your landlord will likely have a few requests, too. You might need to share sales figures showing that your business has suffered, and that you really do need relief. Some landlords will want proof that you’ve submitted an insurance claim for business interruption.
If you’re not getting anywhere with your landlord, you might want to take a look at the Small Business Reorganization Act, says Horton. That legislation was significantly amended by the Cares act to include businesses with up to $7.5 million in debt.
It’s a simplified approach to bankruptcy — yes, that sounds scary — and available only to businesses that can show they are viable if they can get a break from their creditors. Horton says that some of her clients have contacted multiple landlords using a form letter stating that their business was healthy but couldn’t continue–and that no one would get paid unless the landlords made concessions.
These are hard times and you may have to play hardball. “It made a huge difference in terms of helping the landlords to see what they might get,” says Horton. “No one wants to be out there looking for a new tenant in what is going to be a renters’ market.”