Workspace is one of the top five business expenses for many small businesses. While there’s no common standard for what you should expect to pay in rent, most industries benchmark anywhere from 2% to 20% of business income to go toward rent. But what happens when your business income suddenly drops?
[Read more: How to Negotiate a Business Office Lease]
If your commercial rent costs have suddenly become unsustainable, it is possible to ask your landlord to renegotiate your lease. Here’s how to approach the situation and what to expect if you’re planning to ask for a rent reduction.
Know your options
Before you approach your landlord, be clear about what it is you’re asking for. There are four options that you might ask for during the lease renegotiation.
- Rent reduction: Ask for a lower monthly payment, either temporarily or permanently, given changes in the real estate market.
- Rent abatement: “A rent abatement is like a loan. It means you won’t pay rent for an agreed-upon amount of time, but when those months are up, you’ll back pay the rent in full, sometimes with interest,” explains one expert.
- Partial rent abatement: In this arrangement, you agree to pay some rent for a certain period of time, with the intention of paying back the full amount in the future with some interest.
- Sublease: Ask the landlord if you can lease out space to a tertiary partner, under the agreement that you keep the revenue from their lease payments and are liable for their damages. This can provide your business with an extra revenue stream but also adds some risk to your agreement with your landlord.
Rent abatements are best if you’re going through a temporary downturn and expect things to turn around in the future. If you’re looking for a full rent reduction, make sure you do your research to know how much to ask for based on market conditions and your business’s financial projections.
Present a solution
“We recommend that you approach your landlord with a proposed solution rather than simply stopping the payments. This gives you more options and reduces the risks you will face when the current crisis eases,” write the experts at Harvard Business Review.
Beyond knowing what to ask for, it’s also important to know what you can offer. Can you sign a longer lease in exchange for lower rent? Can you offer them rent as a percentage of your revenue, so the landlord shares in your business's success?
The final negotiation will likely be a compromise between you and your landlord. A compromise could be a final number in the middle of a decrease in monthly payments, or some other solution: a commitment to an extended term, shares in your business or a new subtenant who can help you make up the difference. Try to think creatively, but understand that some landlords may only have a small amount of wiggle room.
The final negotiation will likely be a compromise between you and your landlord.
Put yourself in your landlord’s shoes
Do your research on the landlord’s market position in order to ask for something that’s easy for them to agree to. For instance, some landlords are contractually obliged to stick to the lease agreement with no changes. Others will be more open to working with you if they are managing multiple properties where your business is located, or if other tenants are facing a similar situation.
“Smaller, independent landlords may be motivated to address your specific asset/lease. The actions, stability and liquidity of co-tenants may also be points of leverage with your landlords. Work broadly across your organization to understand all levers that are impacting your sector and business,” said property management firm Cushman & Wakefield.
Remember, landlords are trying to run a business too. Many companies will see any rent as better than no rent and work with you to make sure they still have some income. It’s in their interest to lower their risk, maintain cash flow and stay compliant with their contractual obligations. If you can provide a solution that helps them accomplish these goals, you’ll be able to get a win-win for both parties.
Have an alternative in case negotiations go south
Some landlords are bound to hold firm to the original lease agreement. When this happens, you should have a backup offer that keeps the conversation going.
Throughout the negotiation, make sure you get everything in writing. As part of your research, you should also have a secondary location where you could move your business, just in case. “If your landlord refuses to negotiate, you might need to move your business somewhere that is more affordable. Doing this ahead of time will save you lots of time and money in the future,” suggests Nextdoor for Businesses.
During the pandemic, many states and cities are offering resources for businesses that are unable to make rent payments. Here are some sites to check out:
- Learn how evictions are being handled in your city or state in Millionacres’ up-to-date directory.
- Read Landlord-Tenant Statutes, State-by-State as well as State Laws on Termination for Violation of Lease.
- See which states are halting evictions during COVID-19 on Investopedia's interactive map.
You can also look into getting a low-interest capital loan or an emergency loan to tide you over if negotiations are dragging on. Speak to a financial expert to learn more.
[Read more: What Is a Working Capital Loan?]
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