9 Renegotiating a Commercial Lease Agreement with Nonpaying Tenants

We just passed the halfway mark in 2020, and many corporations and business owners are questioning whether they will have the money to survive. The economic contagion that is COVID-19 has wreaked havoc on our economy, jumping from industry to industry and leaving the threat of financial ruin in its wake. Stay-at-home orders and the general public’s reservations about leaving the house for all but the most basic necessities have evaporated many businesses’ revenue streams.

This loss of would-be customers combined with an increase in the cost of doing business that has come with the new health-and-safety regulations, has forced temporary closures, layoffs, and other aggressive cost cutting measures. Many commercial tenants, big and small, are unsure if they have financial fortitude to survive. For these tenants, the fatal blow comes when they lose the ability to pay rent in accordance with their commercial lease agreements. And then landlords become the target.

Regardless of whether tenants pay their rent, the landlord’s financial obligations remain. Under normal economic conditions, a landlord could compensate for one tenant’s failure to pay rent with rent collected by tenants while searching for a new tenant, but with so many businesses permanently closing their doors and some Texas counties prohibiting evictions, this option is not possible for many landlords. Without these regular incoming rent payments, landlords have sought financial relief from banks and lenders. As state leadership regresses to more restrictive policies, landlords are at a loss of what to do. One thing landlords can do is prepare for upcoming lease renewals by furthering their understanding of options and how they can protect themselves and their property.

First Step for Landlords

Should a commercial tenant default on their rent, the landlord should hire legal counsel with a proven track record handling commercial real estate litigation. Landlords should gather all information in its possession about the tenant, including the original commercial lease agreement and any addendums. The lawyer will comb over the terms and conditions of the lease and discuss them with the landlord. A real-estate lawyer will also be able to provide guidance on whether the landlord should pursue negotiation and—in cases where an equitable solution is not possible—handle the legal matters that accompany evictions.

The mutual goal among landlords and tenants should be to remain in good standing with one another and ultimately resume pre-pandemic lease terms. Given that neither landlord nor tenant has experienced such losses before, it’s important to communicate effectively during negotiation. A landlord’s real estate lawyer will be able to appropriately document everything throughout the process to ensure the landlord will be legally protected and to minimize risk.

Lease Negotiation Options

In order to efficiently negotiate a lease revision with a nonpaying tenant, both landlords and tenants must openly communicate the financial issues at hand so that a practical solution can be applied to the renegotiated lease that meets the needs of both parties. If agreed upon, a lease modification may be resolve the issue for both parties. The following are a some potential solutions.

Changing Lease Terms

The parties can agree to extend the lease by factoring the amount of nonpayment into the rental price of the extended term. A tenant may feel comfortable opting to extend their lease early in order to avoid defaulting on current and past due rental payments. A tenant can extend their lease in a way that presents a more realistic payment schedule that can be met on time, extending the overall agreement until all missed payments are recovered.

Space, Payment Method, and Sublet Amendments

The parties can agree to modify the size of the leased property to better align with a tenant’s ability to pay, while at the same time allowing the landlord to repurpose the previous lease and potentially gain a new tenant to recoup losses.

Additionally, for some landlords, physical modifications or improvements to a commercially leased space may be more beneficial than repayment of delinquent accounts. A real estate lawyer will be able to draft a contract between parties stating the terms of agreement on modifications so that a landlord properly protects their business and property.

While not favored by all landlords, the option of allowing a tenant to sublet could be a way to recover losses in an expedited fashion. Due to the nature of subleases, it’s recommended that a landlord considering such an amendment to a lease agreement do so only under the direction of a real estate lawyer.

Commercial Lease Agreements

For Houston landlords and business owners, rental income losses have been an unfortunate reality for some time now. While landlords attempt to work with tenants unable to make rent payments, they have their own business expenses and financial hardships causing turmoil. Through lease negotiations facilitated by an experienced real-estate lawyer, Texas landlords can recover damages while maintaining tenant relationships.

If you have more questions about lease negotiation options, contact the business litigation attorneys at Burford Perry LLP today to learn more about how we can help.

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