Q: I know most of your columns address residential real estate issues because I’m sure that’s what most of your readers want to learn about. But, if you will, I have a question about our commercial real estate issue. We run a small business in Fairfield. We rent space in a strip mall and have been there for three years. We have two years left on our 10-year lease and have an option for five more years. As with most everyone else we know, business is slow. Really slow. We just can’t keep the doors open anymore if we have to pay the same high rent. When we signed the lease, before the meltdown, the rent was high but business was good. Now, half the spaces around us are vacant and new rents are half of what we’re paying. Do we have any leverage with our landlord if we try to negotiate new rent? A property management company deals with the whole complex and they are simply uncooperative. If we decide we have to close the business, what happens to the lease?
A: Well, the reason I write about residential real estate issues is because that’s what constitutes the bulk of the emails I get each week. With regard to your letter, I’ve met with maybe
100 people in your circumstance over the past six years. So, believe me, you’re not alone.
The laws dealing with commercial real estate are very different from those that deal with residential transactions. Lawmakers have always presumed that people dealing with commercial real estate are sophisticated business people and don’t need the help or protection of consumer protection laws.
Of course, this is only sometimes true. So I suspect the lack of consumer-friendly laws in this area has more to do with whose money backs the most politicians. But that’s just my educated guess.
The simple answer is no, you don’t have any legal leverage to get your landlord to reduce the rent. In fact, if your lease contains an annual escalation clause, the landlord can enforce increases in your rent regardless of the economy.
But there may be a practical solution. If your landlord has a nickel’s worth of sense, they want to make sure you stay there and rent from them. Lower rents are better than no rents, which is what the landlord is looking at for at least the next several years.
Since your lease is coming to an end in two years, you can call your landlord and see if he’s willing to negotiate a lower rent in exchange for you going ahead and extending the lease now. This is really common with larger, big-money types of landlord/tenant relationships.
Typically, the small business person just doesn’t have any real economic leverage to make a deal of this type. But times have changed. Your rental payment is now a lot more valuable to the landlord than it was five or six years ago. So that is what I’d try.
Make sure you determine the maximum amount of rent you can afford and still keep your doors open. You certainly don’t want to extend your liability period for the lease if you can’t continue in business.
Speaking of liability, in the event you go out of business, I’m afraid your liability is total. In a normal market you’d have choices. You could sublet the space to someone else, and maybe even turn a small profit. You could offer the space back to the landlord who might agree to take it if he was comfortable he could re-rent it quickly for at least what you were paying.
But as it is, with little chance of subletting or re-renting due to the already available empty units, the landlord could and will sue you for any unpaid payments between now and the end of your contract. In that event, your options are to pay or file for bankruptcy protection.
So I’d try hard to negotiate an extension in return for lower payments. If you don’t feel comfortable doing this, you can hire an attorney or commercial real estate broker to represent you in the negotiations.