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Distressed commercial real estate lease? Time to try a workout

2020 was a tough year, but problems with the commercial real estate market are headed right into 2021. After almost a year of disruption, including eviction moratoriums, massive numbers of office workers working from home, and virtually no street traffic for restaurants and retail establishments, many landlords and tenants may be on their last hopes.

By November, 10.2% of the loans in the commercial mortgage-backed securities (CMBS) market were in “special servicing,” which means they’re in enough distress that borrowers are looking for temporary debt relief. That’s less than the 12.6% peak following the 2008 recession, but that peak took two years to reach.

I can’t pay my commercial lease. What options do I have?

In these challenging times, many small companies have been holding on by their fingernails. Rent is probably one of the largest expenses you have as you run your company, but that rent is far outside of market value now. What can you do?

There are some options for renegotiating your obligations:

Forbearance – Your landlord agrees not to move for eviction for a particular period of time, even though you cease paying rent. The rent does continue to accrue, but you get breathing room.

Rent reduction – Your landlord may agree to accept less in rent due to changed market conditions.

Space reduction – You may be scaling back for now, or many of your workers may be working from home. If you need less space for the foreseeable future, a reduction in space could save you money.

Reduction in penalties – If you have missed rent payments, you may owe penalties. If you’re back on your feet, your landlord may be willing to waive some of those penalties in an effort to help you stabilize.

Subletting or transferal – If you can’t afford to stay but your lease won’t be up for a while, you could sublet the premises or transfer your lease obligations to another party. This may already be allowed in your lease, but you should have an attorney read it to make certain. If it is not, you may still be able to negotiate with the landlord.

The reason your landlord may be willing to give you these breaks is that the entire market is under stress. Landlords are struggling to keep tenants who were once long-term success stories. If you are forced out of your space, the landlord has to find someone new to rent it — or leave it empty. Landlords have some incentive to be practical, especially for a proven business.

To get started, talk to an experienced commercial real estate attorney who can assess your situation and make recommendations.