Many small business owners will reach a time and place where the only way to weather a downturn in profitability is to reduce some of their costs. And for many business types, a rent reduction is key.
If you’re on a cost-cutting search, your fixed expenses are always an easy place to start. These are the payments that show the same numbers every month on your profit and loss statement, eating up cash flow and profits, regardless of how much or how little revenue you have earned. One of the biggest fixed expenses that businesses must pay every month is rent. Since most rent is due on the first of the month, it can be an especially daunting number to swallow. So it is natural that a business owner experiencing some financial difficulties might start looking for a reduction in their monthly rent expense. There are lots of good reasons to take a look at rent reduction for your commercial space; maybe the general economy in your area has tanked and you know the market rates have dropped dramatically. Or maybe you’re looking to sell your business and you want to make it more attractive by lowering the fixed costs. Or maybe you’re just tight on cash flow and need some relief. Whatever the issue, there is often one single obstacle standing in the way of you your goal, that pesky binding legal document known as a lease. This is an intimidating piece of paperwork but you should not let it deter you from looking for creative solutions. Just because a lease exists does not mean it can’t be modified, altered, rewritten or even terminated, as long as both parties reach an agreement. A commercial landlord and tenant can always negotiate and renegotiate their legal and financial relationship. Many landlords prefer to have their buildings fully occupied and stable, and are more motivated to help you stay in place than you might think. Your first step in starting the process is to determine what exactly you want as the solution to your particular rental issue. There are quite a few options for rent reduction.
Option 1: Have Your Rental Rate Lowered Temporarily
Most commercial landlords don’t just reduce rent for the heck of it, but they are often open to short-term rent reductions, especially if there is an economic downturn in your area and market rates for new tenants have gone down. Reliable tenants are hard to find during a recession, and since most landlords don’t like empty spaces in their buildings month after month, you will likely get some relief. The same applies if your neighborhood has changed dramatically since you first rented your space. Perhaps long-term road construction has repelled customers, or a big anchor store in your shopping center has moved out. If the landlord or management knew that these changes were coming to the center at the time of your lease signing but neglected to tell you, you have compelling reasons to demand some relief, either in the form of early termination or a reduction in rent. In a case like this, you should consult a lawyer who specializes in leasing to help you determine your best approach. Even if no external forces are causing your business difficulties, you can still request relief from the high cost of rent simply by explaining your problem to the landlord or management. Many property owners and managers sympathize with small business owners and some will give tenants, especially those who pay on time, certain concessions simply as a matter of policy. Obviously some owners won’t be the least bit sympathetic even if you’ve been a model tenant for years, but you won’t know until you make the request. A lot of landlords will ask you to open up your books in this situation, so you’ll want to make sure you’ve dotted your i’s and crossed your t’s financially before making an initial approach.
Option 2: Subleasing
Subleasing all or part of your space to another tenant while you either move to another place or share the space with your sub-lessee is another option. The sublease agreement is between you and your subtenant. Your own lease remains in effect and you are still responsible for payment of rent to the landlord. The difference is, you collect rent from your subtenant to help pay for it. You must read your lease carefully to find out if subleasing is allowed, and if so, what you need to do to make it happen. Laws about leasing and subleasing also vary from state to state. If allowed, you will need to get written permission from your landlord, who must respond within a certain time period. In some states, such as California, landlords can’t refuse without good reason. Subleasing can get complicated, but the cost savings may be high enough to compensate for that. Your own role will change from tenant to an odd mixture of tenant and landlord, plus you still have your own landlord to deal with! It is a good idea to seek legal advice before drawing up your sublease agreement. If you’ve stumbled across this article and you’re about to sign a new lease for the first time, take this as a warning to request that subletting arrangements be a pre-agreed part of the document.
Option 3: Sharing Space
Sharing your space with another business is also an option, in which case you will need to contact your landlord and ask to put your original lease agreement into both parties’ names. Landlords, as a rule don’t like this kind of change, as it means they’ll have to ‘go after’ multiple parties in the event of a failure to pay. That being said, they don’t like not getting paid either. So, if you can convince them that this is their best way to ensure timely payments each month, they may consider your proposal. Remember, unlike a sublease, your potential co-lessee would need to go through an approval process. You would both share equal responsibility for meeting the lease requirements, rather than you acting as both a tenant and landlord.
Option 4: Lease Assignment
A lease assignment is an option if you want to relinquish your rights to your space altogether and hand everything over to someone else. This is a common process when you sell your business and the new owner takes over your existing lease. But, it can also be an option if you simply wish to get out of your space. Again, you must read your lease closely to see if assignments are allowed and under what circumstances. Assignment laws may vary from state to state. Your landlord will be more involved in this process, and most likely will furnish the assignment contract. Your role would be finding the right tenant to take over.
Option 5: Asking for a Smaller Space
Moving into a smaller space in the same building or in a different building owned by the same landlord is another good way to reduce your rent expense. You would get a new lease drawn up and your old one would be history. This can be a win-win for both tenant and landlord, since the tenant gets a lower rent and the landlord fills a smaller vacant space while looking for a new tenant for the larger one, perhaps at an even higher rate than what you were paying. Of course there has to be an available smaller space for this to work. But again, you won’t know until you ask.
Option 6: Asking for Early Termination
As you know, if you stop paying your rent because your business suddenly went south, the results will be unpleasant. You will be served a notice and evicted, but that will not end your obligations according to your lease. The ownership has every right to go after you for the total amount of rent that you owe – and unfortunately that includes not just for previous months you haven’t paid, but all the rent left on the remaining term of your lease. However, if you ask your landlord for early termination (while you are still paying some rent), you may find that the owner would rather help you leave than hire a lawyer to run after you. It may be that all you need to do is make your space available to be shown to prospective renters. You can help this process by actively seeking a new tenant yourself. Enlist your friends and relatives to help you find someone who wants your space. The financial repercussions of this kind of disaster can be mitigated by ensuring you have the appropriate legal structure and business insurance in place. The key here is that you arrange your affairs carefully so your personal credit and finances aren’t decimated by a failure of your business.
Making your Case What is the best approach when it’s time to present your case to your landlord? You may think you know who holds the power here, but don’t underestimate your own ability to present a persuasive, compelling argument. For starters, you want to compose a letter that states clearly what you would like to have happen. If writing is not your thing, create a rough draft and have someone revise and polish it. Here are a few tips for writing a good letter: * Be clear about what you want and why you want it.
- Be honest. If you are having problems in your business, explain what they are and how you are going to solve them. If it is a cash flow problem, explain when you expect to have this resolved and offer to open your books to back up your argument.
- Be courteous. If you use insulting, rude, or demanding language in your letter, or if you threaten lawsuits at the start of what should be a negotiating process, you will be much less likely to get what you want. Even if you feel that you are being taken advantage of, if you can state the facts plainly yet politely, you will be in a better position to take further action later. You are creating a paper trail with this letter or email, so make sure it represents you in a good light.
- Ask for only one option at a time. You don’t want to cause confusion. Start with what you want the most. If you want to lower your monthly rent for a period of time, start with that. Be specific and avoid vague or uncertain language.
You Won’t Know Until You Ask When you are faced with high rent costs while your business is going through tough times, it might feel difficult to contact those who have the most power over you – such as your landlord – and ask for help. While there is a stereotype out there of landlords as uncaring and only concerned with their own bottom line, don’t be so certain that this is the person you’re dealing with until you have proof. Many landlords are more than willing to negotiate with their existing tenants. In fact, you might be surprised to find out that the people you thought were your adversaries turn out to be more like allies. You won’t know until you contact them and make your case.