Communication Between Landlords and Tenants Has Never Been More Important
The coronavirus pandemic has had devastating effects on the retail industry. Unfortunately, we’re likely only at the beginning, as many tenants are scrambling to figure out their rent and other financial obligations amid closures or greatly reduced income due to shutdown orders. Essential retail, such as grocery and pharmacy have fared well and have been able to keep paying rent. However, many centers are filled with nonessential tenants that have been closed for nearly three months. Looking forward, if businesses are not able to get back to sustainable levels of revenue, it is estimated that approximately 30% of small businesses could completely close by the end of the year.
Looking at the other side of this devastating economic situation, landlords are also facing challenges with little to no rent revenue coming in. If landlords are forced into bankruptcy and cannot meet their debt obligations, including mortgages on the property, the property could end up in foreclosure and put small stores and restaurants at greater risk of going out of business. It’s a vicious circle that will also have consequences for the communities shopping centers serve. According to the International Council of Shopping Centers (ICSC), Malls and shopping centers in the United States provide $400 billion in local tax revenue annually. Revenue generated by shopping centers helps to fund infrastructure and emergency services, such as police and fire departments. Additionally, closed shopping centers can create blight and attract crime to the property if it remains empty.
With the possibility of more vacant space and fewer tenants to fill them, both tenants and landlords should try to work together to find solutions that will be mutually beneficial. With that in mind, here are three things tenants may want to consider if they are struggling to pay rent and do not know how to approach their landlord about the issue.
First, everyone should be respectful and cognizant that both parties are facing mounting financial burdens and recognize that stress is high for both parties. Tenants should be honest and upfront with their landlords about their financial situation. Everyone should be willing to compromise and work to find creative solutions. The tenant should be prepared to share financial records with the landlord as part of the discussion, including any funds received from government or community programs.
Many Landlords are working with a variety of tenants and trying to juggle solutions for all of them. Knowing your financial situation helps them balance their responses to each tenant. Tenants in the same center may get different solutions to defaults based on financial viability. For example, at the beginning of the pandemic, several, well-funded national retailers sent notices to their landlords that they would not be paying rent in April. Allowing well-funded tenants to skip their obligations, puts further pressure on the landlord’s financial responsibilities and gives them less leeway to help small shop tenants who likely need the most assistance. Most national tenants had to walk back those notices and pay rent. Others who did not, are now facing costly legal battles as some landlords see no other recourse.
It’s best to communicate with your landlord before you default. If they know your situation in advance, it will give both parties more time to communicate and figure out a solution. A tenant may feel comfortable engaging their landlord on their own behalf however, it is best to consider engaging a professional advisor or leasing agent who is experienced in identifying available options and insight into multiple scenarios to discuss with the landlord. Some options include lease modification, which could include rent abatements or deferrals. It is also important to have your representative or legal counsel review your lease prior to opening discussions so you understand what is legally viable. The landlord may have a mortgage structure that restricts what lease modifications are possible and several legal enforcement options they can use to pursue rent payments. A professional representative will be able to explain what actions a landlord may take in the case of a default.
In the end, the most important thing for tenants to do during difficult times is to have open and honest discussions with their landlords. These conversations are essential for both parties in order to succeed together as the economy improves.