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Bridging the Gap in Lease Negotiations

While we seek to be optimistic about the post-COVID-19 landscape, we also need to be realistic about how quickly the Greater Phoenix economy will recover to the strong position it was in just a few months ago. In early April, Arizona Governor Doug Ducey signed Executive Order 2020-21, which ceased evictions and lockouts of small business tenants (500 or fewer employees) until May 31. Tenants are still obligated to pay the rent that was owed, however; failure to do so would put them in default and at risk of the customary eviction or lockout proceedings once the order expires. On April 29, Governor Ducey announced the extension of Arizona’s stay-at-home order through May 15. The order included some modifications, such as the partial reopening of retail establishments starting May 4 for curbside pickup and delivery and a further loosening four days later. Dine-in at restaurants is expected to resume in May, with a best-case scenario of May 12.

 

With the deferral of rent payments and stalling of foreclosures, it will likely be next month or even later this summer before the full state of the market is clear. In the meantime, many landlords and tenants alike will be heading to the negotiating table. With lower rental rates occurring in the market, current owners may need to be more flexible on terms to avoid vacancies and retain viable long-term tenants. With COVID-19 impacting their revenue streams, tenants are seeking ways to decrease expenses, across most asset classes.

 

How do they bridge the gap? It can be tempting for tenants to overplay their leverage, but the more prudent course is to make good on their responsibilities if they have the ability. Likewise, it is in a landlord’s best interest to have their tenants survive and thrive.

 

For both parties, the best plan is to consider the relationship aspect—first and foremost, negotiating in good faith. The main priority is to sit down and proactively problem-solve, with open books and minds. This includes recognizing that the person on the other side of the table may be going through difficult times as well. If the situation is contentious, enlisting a neutral third party can help pave the way for a mutually agreeable deal.

 

Common rent concession options include lease deferrals (tacking delinquent rent onto the back end of the lease); temporary lease waivers; rent reductions for a given period of time or the remainder of a lease; or even extending a lease at a lower rate upon expiration.

 

Beyond traditional leasing deals, we are observing an increase in subleases, as office-based businesses scale back on headcount and consolidate resources. Along the same lines, there are numerous cohabitation/office sharing opportunities starting to hit the market, a trend we anticipate will continue for the foreseeable future.

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