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Negotiating A Current Lease During COVID-19

Austin Postler
Austin Postler
Updated April 07, 2020

Our clients are likely looking for ways to preserve cash, which means they will likely be pausing all activities that require any cash payments, such as signing a new commercial lease. Unfortunately for many companies, time will not be on their side.

Here are few tips to consider for our clients who are proceeding with negotiations on a new space.

Critical Lease Dates and Milestones

COVID-19 has put the entire world on hold.  Naturally, commercial leases will also experience delays. It will be important to revisit critical lease dates as we finalize lease documents to ensure we are accounting for pandemic related delays.

It's important that a tenant understand all of these time-sensitive lease deadlines, which can include the following:

  • Due Diligence Periods
  • Permitting/Entitlements Periods
  • Tenant Build-Out Periods
  • Rent Commencement Dates
  • Deadlines for Opening Business to Public

Free Rent

Just as we need to revisit critical dates in the lease, it’s also appropriate to discuss delaying lease commencement and/or adding months of free rent. Facing uncertainty, many landlords will be more willing to accommodate tenant requests to ensure a deal is done, rather than walk away from negotiations understanding many tenants have taken themselves off the leasing market.

Commencement and occupancy dates are likely 30 - 90 days away already, so adding free rent further delays the start of their rent payments and may give our clients peace of mind.

Other Concerns

Among the many concerns our tenants may have during these uncertain times is depleting their cash reserves by writing a large check for a security deposit. Fortunately, we can construct options for our Tenants that will help them preserve cash.

There are multiple options worth considering that avoid large up front cash payouts that will help our tenants preserve operating capital.

Letter of Credit

Issued by the Tenant’s bank, it’s a guarantee by the bank that the client will be able to pay the security deposit, if necessary, at a future date. The tenant must apply for a letter of credit and be approved by the bank. If approved, the bank may charge the tenant a percentage of the amount for issuing the letter.

If a client is eligible for a letter of credit, the landlord must also be agreeable to using a letter of credit in lieu of a security deposit.

Surety Bond issued through

Similar in nature to a letter of credit, rather than having the tenant commit funds through their bank, a third party issues a surety bond as collateral for the security deposit. If the Landlord requires funds from the security deposit, the bond company pays out funds from the bond. The tenant must apply for a surety bond, and if approved, pays a monthly premium to the bond company.

To use a surety bond in lieu of a security deposit, the landlord must be agreeable to this arrangement.

Insurance policy issued through* (Only available in Texas)

Otso underwrites and issues an insurance policy against the security deposit. Just like a letter of credit or a surety bond, the tenant avoids paying a lump sum security deposit. If the landlord requires funds from the security deposit, they file a claim with Otso and receive payment. If approved by Otso, the tenant pays a monthly premium to Otso.

Just like surety bonds and letters of credit, the landlord must be agreeable to this arrangement.

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