CFOs are better off negotiating with their landlords than trying to evoke an escape clause, such as force majeure or interruption of business, if they want reduced rent on the offices their companies have vacated to work remotely, specialists say.
It's reasonable for CFOs to think the pandemic presents the one-of-a-kind situation that escape clauses were intended to address, but landlords are generally well-protected in this situation, Goodwin real estate attorney Katherine Murphy said in an Airbase webcast.
The stay-at-home mandates have devastated businesses like retailers and restaurants, but they’re also making CFOs of other types of companies wonder whether they should keep paying rent if their employees are working from home and their offices sit empty.
From the perspective of these CFOs, getting landlords to give them a break on rental payments makes sense, otherwise they’re making lease payments every month without getting any use of the offices in return.
But landlords have a counter-argument: Their building is open, the lights are on, the HVAC is operating, so it's entirely on the shoulder of their tenants that they're not getting any use of the space they’re leasing.
"Landlords are taking the position that you’re free to walk in and use your space; it's a government shutdown order that’s keeping you from doing that," said Murphy.
Even force majeure — the act of God clause — doesn't provide much of a pathway for CFOs trying to get rental concessions on space they’re not using.
"I've never seen a force majeure clause, when successful, allow for nonpayment of rent," said Murphy. "It won't excuse you from the rent stream."
Same thing with interruption of business clauses. Since it's the government, not the landlord, that’s keeping you from using the space, it's not the obligation of the landlord to give you a concession on your rent, she said.
Other clauses like that, including right to peaceful enjoyment of the property and constructive eviction, fail for the same reason. These clauses only work if what’s keeping you from using your space amounts to an eviction. For example, if there’s something about the building that keeps you from conducting your business there, you're effectively evicted. At that point, you have an argument. But since the lockdown is driven by the government and also unlikely to be permanent, you're not positioned to succeed with the idea that you’re effectively evicted, she said.
Some companies are even looking at the lockdown orders as a form of government taking, but whether this tactic will work will have to get litigated in court, said Murphy. On its face, it faces a steep hurdle, because a taking typically means a permanent taking; the idea of a temporary taking is novel.
Opportunity for negotiation
Given these steep hurdles, you're better off using whatever leverage you have as a tenant to negotiate a trade-off with your landlord, said Murphy.
Landlords have an incentive to work with you if your company has been a good tenant, because when lockdown orders start to lift, they’re going to want their good tenants to remain in the property.
"Both parties know what’s going on," she said. "Landlords want to come out with a healthy tenant. There's more of a sense of cooperation."
Roy Hirschland, CEO of T3 Advisors, a real estate consulting firm, said there are likely openings in your lease agreement for you and your landlord to have a constructive conversation about rent concessions. Among them:
- Can you exchange your security deposit for rent?
- How much more time is left on your lease? If you have, say, three months, can you offer to extend your lease for several years in exchange for lower rent over the next six months?
- Do you have unused tenant improvements? If you're the financially strongest tenant in the building, can that give you leverage to ask for things if the other tenants are likely to default on their payments?
Your leverage will be even greater a few months down the road as lockdowns start to lift, Hirschland said, because the coming wave of bankruptcies and downsizings means far softer rental markets across the country, so landlords will have an incentive to work with you.
"I can guarantee you there's going to be a lot more empty office space," he said. "I don’t have to be an economist to say that. Things that were a non-starter 18 months ago will be negotiable now."
If you have a year or 18 months left on your lease, and you'd like to do some expansion or renovation when the lockdowns lift, you could negotiate something like a five-year extension, with a right to termination in two and a half years, which landlords in a soft market would find attractive.
Or if space in the building opens up because of the financial troubles of other tenants, you can negotiate options for expansion, more visible signage, and more flexibility and control over your right to bring in other businesses to sublease excess space from you.
"You'll be able to negotiate things you couldn’t have dreamed of a few years ago," he said.
What’s key, though, is for you to let your business needs drive what you negotiate for, not a desire to take advantage of market opportunities.
"I wouldn't try to market-time the leasing of office space," he said. "If you need to lower the rent, start the conversation. Let you business drive your decisions."