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NEGOTIATING CHANGE IN RENTAL RATE

In good times a landlord rarely experiences difficulty in setting the rental rate in a residential lease. He simply asks for, and he will receive, as much as the market will bear. But the converse is true in bad times. The landlord finds his tenants coming back to him for the reduction in rent for any number of different reasons. Those include a decline in market rates and possibly the tenant’s having lost his job. What to do then?

The short answer is: Be creative. That is great advice to give – but the difficult question is how to come up with a creative approach so as to save the rental relationship while the same time delivering some financial relief to the tenant. My purpose here is to outline some negotiating techniques which may solve the problem.

In order to conserve space, I am going to omit detailed discussion of the offer and acceptance possibilities for carrying out the below suggestions.

The first steps are often the hardest ones to contemplate. Why should the landlord negotiate at all? He can take the position that a contract is a contract and the lease will be enforced according to its exact written terms. If you cannot get past this first step, there is little point in considering creative soltions at all.

The most obvious approach, and the one that the tenant is likely to advocate, is a significant decrease in rent. But there are really two approaches: First, The rental rate can be lowered by a specific dollar amount. the question then becomes whether the reduction should be permanent or not The second alternative is to grant the reduction, but then go on to require a pay-back from the tenant in the future.

Note that a similar result is achieved by shortening the term of the lease. Under this approach the tenant is relieved from financial obligations that he cannot pay anyway. Of course, this approach will not work as well for a month-to-month lease where the term of the lease is essentially 30 days.

The timing of the tenant’s making up forgiven rent can be adjusted in a number of different ways. Some examples include a change in the tenant’s own business in the direction of greater income. Another is an increase in the consumer price index or other governmental mleasure of economic expansion.

A different approach, useful with triple-net leases especially, is to reduce the tenant’s obligation to pay for the landlord’s expenses during the term. Those expenses would include payment of property taxes, insurance, repairs, and of the items that the tenant would pay in addition to basic rent. Here there is great room for creativity. All depends upon the nature of the tenant’s business and his finances. The main point is to, as far as possible, use an objective standard for calculating the rent reduction and its repayment.

A similar result can be achieved by adding services or benefits benefitting the tenant. For example, the landlord might volunteer to pay the cost of landscaping where originally the lease remained silent on that subject.

The Landlord should take care not to participate extensively in the tenant’s business. Otherwise, an unfriendly judge might consider the parties to be in a common-law partnership. Tthe consequences can prove painful for the landlord who generally shows a stronger financial standing than the tenant. We call that a “deep pocket.”

The landlord might want to grant a right of first refusal to the tenant to purchase the building when the landlord decides to put it on market. Conversely, the landlord might want to obtain a right of first refusal from the tenant to transfer the lease when the tenant is negotiating for an assignment or sublease to a new tenant. It might be possible to come up with a combination of rights that appear attractive to both parties when negotiated together.

It is always helpful to know the true value of the premises as a rental unit in the current market. One can gather that information by consulting with commercial real estate brokers or more directly by a formal appraisal of rental value. The advantage is that both parties can satisfy themselves that the reduced rate is fair.

The tenant may be attracted by the landlord’s promise to construct some nwe improvement to the premises without further negotiation. Here it is helpful to know what shows up on the tenant’s wish list and how much that improvement will cost. Again, it is critical that both parties understand each other’s needs order to formulate a construction schedule that delivers benefits to both parties.

Ideally each party will have his own attorney. Those attorneys should be independent. The compromise will likely take the form of amendment to the lease; and with a written lease the amendment itself should be in writing and signed by both parties. An experienced real estate attorney should assist with the drafting of the amendment.