IRA Financial’s Adam Bergman talks with Michael Tobin, Esq., a veteran real estate attorney, on options to small business owners with respect to commercial rent obligations during the COVID-19 pandemic.
A big question on many people’s minds is: “Should small business owners pay rent?” We’re lucky to be joined by Michael Tobin, Esq., to discuss this topic. So many businesses have been closed across the country due to the coronavirus. Obviously, no money is being made as a result. Should business owners be forced to pay the commercial rent on their business spaces?
Two Types of Scenarios
We’ll be focused on two different types of small businesses in the podcast. These are just two examples of the kinds of businesses that have been forced to close. First, is a restaurant. It’s almost a given that if you own a restaurant, you have been forced to close your doors for dining. Many restaurateurs are able to do carry-out and delivery. However, revenues are down 80-90% and many employees have been laid off. You know you have a rent payment due, but should you be forced to pay it.
Secondly, is a consulting firm. The good thing about these types of businesses is the ability to work from home. Businesses that don’t need face-to-face interaction can telecommute and still get their jobs done. However, many firms like these do rent out office space. Again, due to the lock-down, offices are closed. Should you have to pay the rent on a space you cannot even utilize at present?
Should Small Business Owners Pay Rent?
As Mr. Tobin says, we are in uncharted waters right now. There is no precedent for the current pandemic. Whether you are a landlord or a tenant, there is no cases to look to for guidance. However, we are all in this together, no matter your income or stature. The one thing you have is time.
Federal legislature, such as the CARES Act, are helping people deal with this situation. There will be no evictions or foreclosures because you couldn’t pay rent or a mortgage during this time. You will need to decide if you want to stay at your location. If so, you should talk to your landlord. They will be understanding during this time. They probably know that this may be your only source of income. But, as long as the business is closed, you aren’t making any money. You will not be kicked to the curb if you cannot fulfill your rent obligations. Mr. Tobin does recommend having representation during these matters. If you can come to an agreement with your landlord, it’s best to get it in writing.
What if You Receive Help from the Government?
Billions and billions of dollars have been made available to small business owners. The two main loans you can apply for are the Payment Protection Plan and the Economic Injury Disaster Loan. Businesses with less than 500 employees can apply for these loans. They are there to help cover both employee salaries and other expenses associated with your business.
Let’s say you have (or will) receive money via one of these sources. Again, the question is: should you pay your rent? Shrewd business owners will make the most of this money. They will pay their employees first and then look at other expenses. However, if your landlord is aware of the loan you received, he or she may ask to get a cut of it. This is not an unreasonable request. Again, you should work closely with your landlord. Afterall, they have expenses too!
What if You Want to Get Out of Your Lease?
Force majeure refers to a clause that is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and prevent participants from fulfilling obligations.Investopedia
Force majeure has been frequently talked about because of coronavirus. Obviously, a pandemic is not usually covered in one’s lease as an “Act of God.” When the courts reopen, many people will argue that they can get out of their lease because of this. They may have recourse. Of course, this will be on a case by case basis. Hopefully, if you want to move on from your lease, you can work something out with your landlord. They know what you are going through. Your reputation, lease term left and other factors will weigh into this decision. It’s best to keep the courts out of it, if possible.
Keep in mind, if there is no personal guarantee on the lease, it will be easier to break it. That sort of gives you leverage, but don’t overplay it! If you really like your space, you want to make sure you can keep it. The marketplace will soften and there won’t be many tenants looking for spaces. However, don’t get greedy. If you have a prime location, don’t risk it by demanding too much.
It’s all about communication. Keep in touch with your landlord every step of the way. Make sure he or she knows why you are not able to pay rent. It’s all about how you act, not react. Keeping a great rapport with your landlord will benefit you both in the long run.
A special thank you to Michal Tobin for joining us on Adam Talks. Be sure to check out his website if you have any real estate questions. Thanks for watching, and catch up on all our podcasts on our SoundCloud page.