How Small Businesses Can Address Rent Payment Issues

Many Businesses Were Financially Stressed Before the Pandemic Started

Small business owner stress

Getty Images/Charday Penn 

The COVID-19 pandemic has undoubtedly had a major impact on U.S. businesses. As of August 31, 2020, 163,735 businesses had closed for reasons related to the coronavirus, and 60% of them (97,966) indicated they would not reopen. Many businesses that remain open have experienced a loss of revenue. According to Harvard-based nonpartisan research and policy institute Opportunity Insights, small business revenue decreased by 23.2% between Jan. 20 and Sept. 29, 2020. When businesses lose revenue, they may be unable to pay their rent.

Financial Issues Small Businesses Face

Small businesses face a number of financial challenges that can impact their ability to meet their rent payment obligations. Here are some of them:

  • Lower revenues: Revenues have fallen for various reasons, including declining demand and government orders to shut down the business or limit the number of customers.
  • Supply chain problems: Some small businesses have had difficulty obtaining raw materials, intermediate inputs, or finished goods from suppliers.
  • Costly safety protocols: Small businesses have incurred costs to comply with hygiene and safety protocols issued by the Occupational Safety & Health Administration (OSHA), the Centers for Disease Control and Prevention (CDC), and state health departments.
  • Operational changes: Many businesses have been forced to institute costly operational changes. For instance, many restaurants have switched from on-premises dining to takeout or delivery service. This has caused them to incur substantial packaging costs.
  • Limited access to capital: Small businesses typically have little cash on hand and limited access to financing. Manufacturers and retailers may have a significant portion of their working capital tied up in inventory.

In a June 2020 survey of small businesses, McKinsey determined that many small businesses were already experiencing financial problems before the pandemic, which only added to their difficulties. In fact, almost a third of the 1,000-plus respondents said they were just breaking even or were operating at a loss before the coronavirus outbreak started. 

What Are Tenants’ Legal Rights?

Commercial tenants are presumed to be sophisticated business people, so state laws afford them far fewer rights than residential tenants. The laws allow residential tenants to withhold rent or vacate the building mid-lease under certain circumstances. 

Commercial tenants, however, generally only have the rights specified in their lease.

Due to financial hardships related to the pandemic, many residential and commercial tenants have been unable to pay their rent and are facing eviction. Some state and local governments, as well as the CDC, have responded by issuing orders that impose moratoriums on evictions and give tenants more time to pay rent. The orders vary widely. Some apply only to residential tenants while others apply to residential and commercial tenants. Some orders have already expired. Details about the status of executive orders are available on state and local government websites.

How Tenants Can Negotiate With Landlords

If a business is having difficulty making rent payments due to COVID-19, the first thing to do is review the lease. The lease should explain what will happen if the tenant fails to pay rent. Some commercial leases contain provisions allowing the tenant to suspend rental payments under certain circumstances, such as a forced shutdown. These provisions aren't common, but it's worth checking the lease anyway. 

 One provision to look for is a “force majeure” clause. This clause allows a tenant to postpone or suspend certain obligations in the event of extreme circumstances that are beyond the tenant's control. The types of circumstances covered by force majeure clauses vary but may include Acts of God, wars, terrorism, viruses, and pandemics.

Most force majeure clauses do not relieve the tenant of the obligation to pay rent.

Landlord Responsibilities and Options

A commercial landlord's obligations to their tenants are largely determined by the lease terms. If a tenant is unable to pay rent due to pandemic-related issues, the landlord should review the lease. They should focus on provisions related to rent, including any clauses (like force majeure) that might allow the tenant to break the lease. In addition, the landlord will need to comply with any relevant eviction moratorium that’s been issued in their state.

While landlords are entitled to the rental payments outlined in the lease, they should recognize that tenants may have little cash on hand and may be unable to repay rent for some time. They should work with tenants to come up with a payment solution that both parties can live with. Here are some options they might consider:

  • Rent reduction: The landlord may lower the rent for all or some of the time remaining on the lease.
  • Rent deferral: A deferral allows the tenant to pay outstanding rent at a later date.
  • Rent abatement: The landlord may forgive a portion of the rent owed.
  • Conversion to a loan: The landlord may convert past-due rent into a loan the tenant repays over time.
  • Apply deposit toward rent: The landlord may apply the deposit to rent owed.
  • Sublet the space: The landlord may allow the tenant to sublet all or a portion of the space to another tenant.

Resources for Small Businesses

If you are a small business owner and can't pay your rent, there are resources available to help you. The first place to check is your state or municipal government. Find out whether it's offering assistance—such as emergency funds to pay rent—to small businesses in your situation.

Another source of financial assistance is the Small Business Administration (SBA), which offers a variety of funding options for small businesses affected by the pandemic. An example is an Economic Injury Disaster Loan, which is designed for businesses experiencing a temporary loss of revenue due to the coronavirus. Proceeds of the loan can be used to pay for rent, utilities, and other operating expenses. The SBA also offers bridge loans and debt relief on existing loans.

Finally, get help from an attorney if you are having trouble deciphering your lease or negotiating concessions from your landlord. Low-cost legal services are available from online providers like LegalZoom and UpCounsel.  Alternatively, you can seek a referral to a low-cost attorney from your industry trade group or your state's bar association.