COVID-19 and Rent: What can Landlords and Tenants do?
Written by Lee Shephard, Property Manager
COVID-19! How the world has changed since the beginning of 2020. Very few people outside of the world’s medical community had heard much of the coronavirus at that time. The comments were largely about a situation that was occurring in China and there was little discussion of it outside of China and in the general news cycles.
That is not the case today as our world is completely occupied with COVID-19 and its impact on our communities. The talk has shifted somewhat in just the past week from the fact that we were about to be consumed by the effects of this virus to now starting to refocus on how we go forward. Some businesses are beginning to reopen to restart the economy and to get people back to work so they can support themselves and their families. For the time being, this is the “new normal.” I feel we have a way to go and real estate will be impacted in the near term as well long term. Below are the different considerations for landlords and tenants during this time:
COVID-19 has effectively put many of your tenants out of business. By following the government mandate, these tenants have little or no income, and therefore have a diminished ability to pay their rent. If necessary, it is in the landlord’s best interest to negotiate a reasonable solution to help the tenant fulfill their lease obligations and stay in business. A reasonable solution to this problem is the deferral of current rent for the near term with the amount of the deferral to be repaid by the tenant after their ability to generate income returns with an increased rent. Another option is to renew a lease now, extending the term providing both landlord and tenant with additional security down the road. This is a time to work with your tenants to help them be successful. While it is prudent to work with the tenants in any event, many municipalities are also making it difficult or illegal to evict a tenant during this time.
Landlords can also anticipate that their revenues will be reduced and therefore should make reasonable efforts to reduce operating costs, including:
- Utility usage can be reduced because of limited occupancy.
- Only essential repairs and maintenance activities should be completed; elective issues should be postponed for as long as possible.
- Non-essential capital projects should also be postponed until rental revenues have returned to normal.
- Those properties with common areas such as office buildings need to be regularly cleaned and inspected.
- Landlords should be certain to have all vacant spaces inspected and cleaned on a regular basis to ensure no damage has occurred.
Landlords should maintain an open line of communication with their lender if income is reduced due to tenants not paying rent, which may impair the landlord’s ability to make mortgage payments. The lenders may be resistant to forbearance initially they will need to engage with their borrowers if the lack of rental income goes for a prolonged period.
All tenants should be certain to investigate the available government loan/grant benefits to see if they qualify. Businesses should also be in regular and constant communication with their lenders, vendors, and customers to find ways to reduce their overhead costs, generate new methods or sources of income, and postpone any unnecessary projects. Depending on the type of business, encourage your employees to work from home if possible.
If your employees are coming to their place of work, practice social distancing guidelines:
- Keep a minimum of 6 feet from each employee’s work area. This might involve rearranging the workspace or staggering work schedules.
- Provide your employees with adequate protection.
- Disinfect workspaces regularly.
- Encourage employees to stay home if they are not feeling well. If an employee tests positive for the COVID-19, all other employees need to be informed and possibly tested.
- Stay informed on guidelines from the Centers for Disease Control and Prevention (CDC).
If you have had to physically close your business due to governmental mandates, please be sure to have someone check your space on a regular basis to ensure no accident, vandalism, or damage has occurred. The danger of significant damage to a building is far greater when it is unoccupied. If something goes wrong, there is no one there to witness or report it in a timely manner. You may need to hire security for your premises depending upon your own unique situation.
Keep communication lines open with your landlord. If you feel you need rent relief, document your needs giving the landlord enough information to make a decision that benefits both of you. Most landlords will want to see financial information from previous years, including income statements and balance sheets along with current year information. With these documents, they can make a judgment about the impact that COVID-19 has made on your business and compare it to your previous years. They also want to see that you are taking other actions to reduce your overhead and not just relying on them as the landlord. Lastly, the landlord wants to be certain that you have a plan in mind regarding your business going forward. Keep in mind most landlords have ongoing operating costs such as taxes, insurance, and physical maintenance of the property. They may also have mortgage obligations and are unlikely to be able to completely forgive rent payments. Many landlords will work with their tenants if they see that the need is legitimate and verifiable.
Hopefully, this will be a “once in a lifetime” event and the cooperation between landlord and tenant has rarely been more crucial to the survival of both. We at NAI Puget Sound Properties have extensive experience with working with both tenants and landlords in both good and difficult markets and are available to assist you with your real estate needs.