Navigating the post-pandemic commercial property market — especially in New York — has been fraught with challenges for both tenants and landlords. The sudden shift to remote work led to even further complexities in lease adjustments, and as companies consider returning to the office, negotiating with landlords for contract changes has become paramount. The economic impact has left tenants paying above-market rates while landlords grapple with financial strain, making landlord-tenant negotiations critical in finding solutions.
Navigating Lease Options and Negotiations with Landlords
The sudden shift to remote work changed the dynamics of office space needs. Some companies have been moving back to the office and seeking contract adjustments or payment flexibility. Some are looking at potential changes in space needs, others are looking to create safe and efficient work environments that comply with new health and safety protocols, and still others may be considering whether a brick-and-mortar location is even necessary. Each of these scenarios has catapulted lease negotiations to the forefront.
In a disrupted commercial property market, navigating lease options and negotiations can be a daunting task, so understanding the available strategies and seeking legal counsel can make a significant difference in securing favorable lease terms.
Here are some options tenants may want to consider when dealing with lease challenges.
- Creating a subsidiary shell entity to sign the lease: By forming a new limited liability company (LLC) to sign the lease, the operating entity is insulated from direct lease exposure. With this setup, tenants can negotiate limited guarantees, notices, payback broker commissions, and other terms. It also could cause landlords to consider the potential consequences of leaving the space vacant.
- Consulting with an experienced lawyer: A knowledgeable attorney can review the lease agreement; identify whether potential claims are landlord defaults; and help use those items to work toward securing favorable lease concessions or reductions, as well as protect your interests as a tenant.
- Subleasing or lease assignment: When the tenant has to exit the lease early, subleasing and lease assignment — both of which require landlord approval — could be viable options. Subleasing keeps the original tenant liable while a new tenant takes over the space; a lease assignment transfers the lease to a new party entirely, which often results in the original tenant being released from all obligations.
- Negotiating in good faith: Building a positive relationship with the landlord and negotiating in good faith can open the door to mutually beneficial solutions. Demonstrating a willingness to work together and find common ground may lead to favorable lease adjustments that benefit both parties and ensure a positive ongoing relationship.
- Considering financial hardship or insolvency: It may be beneficial to discuss a hardship or insolvency situation with the landlord and explore options for lease restructuring or payment adjustments. Landlords may be more willing to accommodate tenants facing genuine financial difficulties, to help maintain a stable tenancy. However, this might require opening the financial books to the landlord, which could pose a risk to future negotiations if the talks go sour.
Understanding the Landlord Dilemma to Create Leverage
Landlords are also in business, facing their own financial constraints due to the pandemic’s economic impact. Many have leveraged properties and face increasing cash-carry costs as rental rates have plummeted, leaving them with few tough choices and making them less amenable to lease concessions.
A landlord could hold strong to the lease and hope for the best, although this comes with risks. Alternatively, they might offer lease concessions, such as rent reductions or months of free rent, as a way to resolve issues through economic incentives to keep the tenant in place. Some landlords may even choose to cancel leases and evict tenants, but this carries significant risks and is usually approached cautiously.
Striking a Balance Between the Lease and the Law
The court system is often slow and expensive, and many tenants seek alternative lease remedies as a middle-ground solution to navigate the gray area between the lease and the law.
While the law provides a framework for commercial leases, there is usually room for negotiation. Avoiding court proceedings is generally the preferred path due tothe risks, uncertainties, and costs involved with litigation.
However, the court system can still serve as a valuable tool when dealing with unreasonable parties. Even after a default notice is issued and court proceedings have begun, negotiations can still take place. The legal process can sometimes prompt parties to become more reasonable and open to discussion, leading to fruitful negotiations.
Determining the Best Course of Action
Whether tenants seek lease concessions or landlords navigate financial constraints, alternative remedies offer hope for a more stable and balanced commercial property landscape where everyone gives a little to come to a resolution.
Determining the most suitable course of action requires a well-rounded team, including business finance experts, experienced lawyers, and knowledgeable brokers. Understanding the specifics of the lease, the current market conditions, and the landlord’s position is crucial in devising a strategic approach. Each decision comes with benefits and risks, and a well-informed team can navigate these challenges like a game of chess — anticipating the landlord’s response and countering effectively.
It’s a three-part process.
1- The tenant determines what they need to resolve the lease conflict.
2- Their lawyer looks at the lease terms to create different approaches for resolution.
3- The broker offers information and guidance about the state of the market to help determine the best parameters and the likelihood of each potential resolution.
Tenants need a guide — someone who understands the court process and the current market — so they can determine what moves to make and how the landlord is likely to counter. Just like a chess game, it helps to be strategic and know the benefits and risks of each move and which is best for the unique situation, before approaching the landlord.
Benefiting from the Thompson Team Advantage
The Thompson team offers a unique blend of both transactional and litigation experience. We have a comprehensive understanding of commercial lease complexities and pride ourselves on being available, affable, and able, ensuring quick and responsible action. With decades of experience in the market, our team is equipped to guide tenants and landlords toward the best alternative remedies for amicable solutions.
Need help determining options for a commercial lease remedy? Reach out to us at email@example.com.