If you are a health care professional, your facilities are vital to serving your patients.  The rent that you pay, if you lease your facility, is likely your second highest recurring expense after your payroll.  To pay your rent every month, you rely on a certain volume of patients each workday.  Due to new physical distancing requirements, sanitization standards, and general patient apprehension about in-person interactions, you may be experiencing reduced patient volumes.  Watching volumes decline, while you continue to cover your overhead, can be stressful. 

Every tenant enters a lease intending to honour the business terms of the agreement, but business circumstances can change.  In the case of the COVID-19 pandemic, things have changed overnight.  When times are tough, your commercial lease doesn’t have to force your clinic into financial distress.  Your landlord may agree to provide some form of rent relief until your circumstances improve.  

Three General Forms of Rent Relief

Your situation is unique to your practice, so it’s essential to understand that there isn’t going to be one rent relief structure that is good for every healthcare tenant.  That being said, rent relief is generally structured in one of the three following ways:

1. Rent Abatement

Abated rent is essentially a free rent period, negotiated with your landlord, intending to help you manage your cashflow. 

More often than not, when a landlord agrees to abate rent, the free rent will apply to your Net Rent, and you’ll still be required to pay your additional rent / operating expenses. 

2. Rent Deferral

Unlike abated rent, rent deferral means that you pay reduced rent for a period in time with the understanding that the deferred amount is paid back, in full, at a later date. 

In Ottawa, it has been far more common for landlords to agree to deferred rent than abated rent.

Assuming that rent abatement is not an option, rent deferral can be attractive to tenants because you don’t typically have to extend your lease.  The deferred rent amount is applied to future rent payments.  The ‘payback’ of the deferred rent can be structured as a lump sum, amortized over a set period of months, or repaid over the remaining term of your lease.

For example, if your monthly Net Rent is $10,000, and your landlord agrees to defer your rent for three months, you will have to pay back $30,000 of rent.  If you have eighteen months remaining on your lease, you would then have to pay back an extra $1,667 per month for the remainder of your lease term ($30,000 / 18 months = $1,667 per month) following the three months deferred rent period.

Although some landlords will agree to rent deferral repayment over an extended time, most won’t be willing to wait for complete reimbursement beyond a couple of years.  So, if you have three or more years remaining on your lease, don’t be surprised if your landlord is not willing to spread out the balance owing over the remainder of the lease term.  Also, many landlords will apply interest to the rent payback calculation.

3. Lease Restructure

As its name implies, when you restructure your lease, you agree to make changes to the business terms and/or clauses in your lease to benefit both you and your landlord.

Typically, when leases are restructured, the landlord agrees to provide a concession like reduced rent in exchange for an extended lease term commitment.  Often, these arrangements are referred to as ‘blend-and-extend’ negotiations.  As such, the terms of your existing agreement are blended with the new business terms of the extended agreement.  In exchange for an extended lease term, landlord concessions could include reduced rent, free rent, or a leasehold improvement allowance.

For example, if you have two years remaining on your lease, your landlord could agree to reduce your present net rent by a couple of dollars per sq. ft. for the next five years in exchange for extending the current term of your lease for another three years. 

Given the current uncertainty, a blend-and-extend can be a great win-win for you and your landlord.  It is important to remember, though, that extending your present lease term may be far less appealing to your landlord if the expiry of your lease term is more than a couple years. 

Important Points to Remember

Ultimately, if the initial conversation is approached collaboratively, it’s really in everyone’s best interest to work together on a mutually beneficial solution.  That being said, there are a few important points to consider before you approach your landlord about rent relief:

Leverage Matters

Unfortunately, simply asking for rent relief is not always enough and isn’t really a negotiation strategy that’s going to produce the best results.  Having real-time knowledge of the Ottawa market and concessions being agreed to by other landlords is the type of leverage that you will need.

Know Who is on Your Side

Your landlord’s leasing representative, or the broker they used to market your space for lease, does not have a fiduciary responsibility (legal and financial obligation) to represent your best interests – he or she is either an employee or a representative of the landlord and is being compensated to look after your landlord’s best interests.

Practice Valuation

Changes that you make to your lease can have a long term impact on the valuation of your practice.  If you are amending your lease, make sure you consider how a new rent structure, changes to the clauses, and the new lease term commitment will impact the value of your practice.

For additional questions about rent relief, restructuring your current lease, and present market conditions, please email me at jeff.daniels@royallepageommercial.com.