Reducing rent? Better sign a lease amendment.
It’s the first of the month again, and landlords everywhere are concerned about how much rent they’ll actually be receiving this month. Retail businesses have been shuttered for weeks, which has left many businesses strategizing whether it makes sense to try and reopen at all.
Most landlords have already discussed rental options with their tenants and come to a mutual agreement. But that agreement may not have been put into writing as a formal lease amendment. If it’s not, then landlords (and tenants) run the risk of creating confusion about the terms of any rental concessions. For instance, if a landlord tells a tenant they can pay partial rent “for a little while,” then neither party is sure about when full rent is supposed to resume. If the landlord accepts several months of partial rent and then requests full rent, the courts might say there’s a factual issue about whether both sides have agreed to depart from the terms of the written lease.
A lot of time, effort and money went into preparing that lease – why risk throwing that away? The simple solution is to put any rental concessions into a formal lease amendment. This does not have to be a lengthy document. But it should, at a minimum, identify the lease that’s being amended, the amount of rent that’s agreed to be paid (or forgiven), and state the time period for the rental concession.
There are several types of rental concessions available, depending on the landlord’s willingness and ability (landlords typically have loans, and may not have been granted any loan forgiveness by their lender). I’ve highlighted the 3 primary types of rental concession agreements below:
Rent Reduction. The simplest form of rent relief is a straight reduction of a tenant's rent. This is also known as rent forgiveness. A landlord can offer a temporary reduction of minimum rent, or just CAM, Tax, Insurance, or a reduction of all. With this, the landlord would not be recouping any of the rent reduction.
Rent Abatement (or Conditionally Excused Rent). This is free (or reduced) rent with a catch. The landlord offers the tenant reduced, or free, rent for a certain time period so long as the tenant does not subsequently default in their payment obligations. If the tenant does subsequently default, then the full amount of the abated (or excused) rent becomes immediately due. Rental abatement is designed to incentivize tenant performance.
Rent Deferral. Instead of a straight reduction, the landlord can defer a portion of the tenant's rent (or expenses) for a temporary time period. The deferred rent would then be paid later, either in a lump sum or by increasing subsequent rent payments. These deferred payments can be due after a certain time period or added onto the end of the lease term. A more complicated form of this would be to amortize the deferred rent (like a loan) over the remaining lease term.
Formalizing any rental agreement is easy and necessary. There’s so much uncertainty out there that taking this simple, proactive step should ensure that you don’t have to worry about the enforceability of your lease agreement. If you need an amendment but aren’t sure about the next steps, don’t hesitate to contact us for help. We’re happy to talk you through it, or to actually prepare one.