§ 19.06 Rent Deferral Arrangements

• Jurisdiction: United States
• Publication year: 2022

§ 19.06 Rent Deferral Arrangements

[1]—Introduction

In an economic downturn, owners of office buildings are likely to negotiate tenant requests for rent forgiveness or deferral. Although landlords generally will not simply forgive a tenant's payment obligations, they may be willing to defer the tenant's obligation to pay a portion of the rent until later in the lease term. The goal is to enable the tenant to get through a period of poor cash flow and avoid having to go out of business. Ideally, when the economy improves, and tenant's cash flow will improve as well, enabling the tenant to resume full rent payments and repay the deferred rent over a period of time. Landlords should ensure that an amendment to the lease to allow a tenant to defer payment should be drafted to minimize the risks of future tenant defaults while also providing the landlord with additional protections. To avoid disputes, the landlord should include an acknowledgement by the tenant of the exact sum of the delinquent rent owed, including any accrued interest or late fees. The amendment should clearly state that the landlord reserves all rights and remedies to pursue collection of the entire rent delinquency should the tenant default in the future.

[2]—Landlord Considerations When Deciding Whether to Grant a Deferral

There are a number of factors and strategies landlords should consider when deciding whether to grant a rent deferral. The four main factors that a landlord should consider when negotiating rent deferral for a struggling tenant are: (1) verifying financial distress, (2) lender requirements, (3) the goal of providing short-term relief, and (4) landlord acceleration rights.

Before granting a deferral, the landlord should verify the tenant's actual financial need by requiring the tenant to provide certified financial statements covering the previous two to three years.¹ This information will indicate the tenant's current financial situation, provide insights into health of the tenant's business, predict (as reasonably as possible) the likelihood of the business coming out of the economic downturn, and suggest the types of deferral terms that would make the most sense.²

"The landlord will not want to be the only party providing concessions to the tenant, so it may offer terms that give some relief, but which also require the tenant to negotiate with its other creditors to obtain similar concessions, thus spreading the risk equally."³

Reviewing the tenant's financial condition may indicate that the tenant is unlikely to recover. In such a case, the landlord may be better off continuing to get as much rent as possible from the tenant while it looks for a replacement...