Help Paying Business Rent: 6 Options Before the Landlord Moves to Evict

If you have fallen behind in paying your commercial rent, you might have a sinking feeling that you could be evicted. Unless you are able to pay the balance in full, you should know what your alternatives are and how they work. You have six options: 1. Rent deferral; 2. Offer landlord concessions; 3. Apply for an SBA working-capital loan; 4. Negotiate a lease exit; 5. Use bankruptcy as leverage; 6. File for bankruptcy. Some involve continued engagement with your landlord. Others don’t. The bad news is that none of these are pain-free.

Before you can weigh your options, you’ll need to know how long you can keep operating at your location. The answer may depend on what your lease says about your notice period for defaulting on the rent. If you’re at the brink of eviction, state law controls how much notice you can be given. The statute in Florida requires that landlords give delinquent tenants at least three days to settle up or leave after receiving written notice. In New York, it’s 14 days (after a written demand).

A Deferral of Rent or a Rent Reduction

If you haven’t already broached the subject with your landlord, make an inquiry as to whether a deferral of rent is in the cards. During a deferral, you and your landlord agree that you can pay part of your rent now and catch up on the rest later. If the landlord agrees to a rent reduction, you’ll pay only a portion of the amount of rent due for the lease going forward. Remember that landlords are businesspeople. They aren’t looking for charity. They will more likely accept a deferral of rent or a rent reduction if they know that an empty office may well stay empty for a long time. In a soft real estate market, getting a better paying tenant can be challenging. Instead of asking for a handout, describe how you plan to keep operating and paying rent after the deferral period.

You may be able to offer your landlord something in return for the landlord’s concession. It could be a personal guaranty, a letter of credit, an agreement to a rent increase later on, or a longer lease term. A landlord’s mortgage lender may need to agree to these kinds of changes to the lease. However, it doesn’t hurt to ask about these alternatives.

If your landlord isn’t willing to consider a rent deferral or reduction, you could explore other ways to catch up on missed rent and remain on good terms with your landlord. That might mean applying for a loan through the U.S. Small Business Administration (SBA). Even if your landlord accepts a deferral of rent, a loan may help; you’ll want to make sure that your business has enough cash to pay the agreed-upon portion of the rent and also to cover the deferred rent later. The SBA microloan program gives small business owners access to loans up to $50,000 for working capital. Community-based lenders distribute funds. The SBA’s 7(a) program allows loans up to $5 million, also for working capital. Paperwork for an SBA loan can be daunting. But you don’t have to go it alone. SCORE offers mentoring at no cost, and a Small Business Development Center (SBDC) can give you one-on-one consulting focused on accessing capital and managing your finances.

An Exit Strategy That Won’t Involve Being Evicted

If you have come to the conclusion that remaining in your current location is unsustainable, you can try to find an exit strategy that won’t involve being evicted. In this arrangement, the landlord may agree to allow you to leave with no further rent owed. If you’re paying less than market rate for your space, your landlord may well be relieved at an exit from the lease. The landlord may not want to risk you being unable to pay rent in the future, so an early termination would allow them to reduce that risk.

If your landlord knows that you are prepared to file for bankruptcy if needed, it could increase your leverage in negotiating with them. It’s even more useful if your rent is above the market. You can tell the landlord that you would rather avoid the time and expense of a bankruptcy, but you also don’t want to go broke trying to keep up your business. You can reject your lease in bankruptcy. Your landlord’s claim for damages from a rejected lease in a bankruptcy is capped at the greater of one year’s worth of rent payments, or 15 percent of the rent remaining on the lease, with a maximum of three years. The landlord’s recovery, if you reject the lease, could be small. Filing a bankruptcy for the sole reason of giving yourself a legal mechanism for extracting yourself from a lease is risky, though: if you act in bad faith, your bankruptcy may be dismissed.

Chapter 11 Bankruptcy

If you’ve done all you could to work out a solution with your landlord and with no success, you could take your business’s financial affairs into your own hands and file a Chapter 11 bankruptcy. With a Chapter 11 filing, you have the ability to continue operating the business while creating and implementing a plan to repay creditors. The ”automatic stay” associated with filing a bankruptcy generally pauses eviction proceedings. The automatic stay can be an enormous relief, but it may not be a perfect solution. This won’t work if the lease term already expired before the filing, though; that is, you can’t revive a lease that has already ended. And, your landlord can ask the court to lift the stay.

You’ll be required to make current rent payments during your bankruptcy. In a chapter 11 case, you have to choose what you will do with your commercial lease within 120 days after filing the case. If you decide to keep the lease, you will have to make up the amount you are behind on it. If you don’t decide to keep the lease after 120 days, unless the court extends that deadline, you must hand the space back to the landlord.

Despite what you may have heard, filing a bankruptcy is not a magic bullet. Bankruptcy will likely be a long and expensive process with a complicated set of rules. It requires a tremendous amount of organizing financial information, working with schedules, preparing financial statements, and attending court hearings and meetings with creditors. Bad news spreads fast. Customers may stop dealing with you, and so may vendors.

No matter which course of action you take, you should not delay. If the landlord properly terminates the lease, a later bankruptcy will not save it. The earlier you act, the better the odds. If you have questions about commercial lease issues, your situation may need the attention of a bankruptcy or leasing attorney in your area.