Tomorrow is April 1, which is the first day since the coronavirus restaurant shutdown that many restaurant tenants will be required to pay rent. Many, quite simply, will not be able to do so and are seeking relief from their landlords. For those able to obtain such relief, it will likely come in the form of either a deferral of rent, or a rent abatement. It is critical for restaurant owners to understand the difference when discussing potential rent relief with their landlords.
- Rent Abatement. A rent abatement is a forgiveness of all or a portion of tenant’s obligation to pay rent. These are obviously the most tenant-friendly arrangements, but they are also often the ones for which Landlords will request greater concessions. As such, though they may seem like great deals at the time, tenants should remain wary and have any rent abatement agreement reviewed closely to ensure that, in exchange for a month or two of “free” rent, the tenant does not give up other important rights, or have imposed upon them difficult obligations.
- Rent Deferral. A deferral of the tenant’s obligation means that the tenant may not have to pay rent when it comes due, but will be required to pay it back later. Sometimes the landlord will request that the amount of deferred rent by paid in lump sum at some specified later date, or over time in the form of increased rent payments. Landlords generally prefer deferral agreements because they maintain the overall value of the lease and do not result in a loss of total income. For those approaching their landlords seeking relief, a deferral agreement also presents to the landlord the overall picture that the difficulties the restaurant is facing are temporary and not fundamental to its business, which is otherwise strong and will be able to resume once the crisis has subsided. Allowing strong tenants to remain in business, after all, is in the Landlord’s interest as well.
There is also a hybrid between the two approaches above, and that is where rent is abated for a certain period (e.g. 3 months), but then the same period of time is added to the end of the lease. As with an abatement, the tenant does not ever have to “pay back” the rent for that period, but the overall income to the landlord during the term of the lease remains the same — and actually would increase because the rent for those final additional months will be at the increased rate applicable at that later time.
Regardless of the approach taken by the landlord in providing rent relief, it is important to know that most businesspeople do not give away something for nothing. There will likely be conditions attached to the relief, or concessions required. How onerous they are, or how transparently they are presented, will vary according to the landlord in question. As such, restaurant tenants should proceed with some care and caution to ensure they fully understand any abatement or deferral agreement their landlord presents them.