By Cliff Ennico
“I operate three hair styling salons as a franchisee of a big nationwide franchise. My state government has shut down our operations because of the coronavirus pandemic as we are considered a ‘nonessential business.’ As the projections for our state to reopen get pushed out further and further, is there a case for me to present to my three business property landlords and my franchisor an adjustment to our agreements? The rent was negotiated in good faith based upon business conditions prior to the pandemic. So far, the only concessions I have received from the landlords is to push out April 2020 rent payment to May 2020 without penalty.”
First of all, as someone whose head currently looks like a Chia Pet on steroids, I do not view hair stylists and barbers as nonessential businesses. If I could make one request of state and local governments during these difficult times, it would be to change their minds about that. Also about liquor stores.
In order to survive the pandemic and related government-mandated shutdowns, a small business needs to get its fixed costs as low as possible. Your lease and franchise agreement do not allow you to suspend payments to landlords and franchisors for any reason, so you have to do some negotiating here.
Let’s take landlords first. Always keep in mind that your landlord is in the same boat you are: He or she has mortgage payments to make to a bank, and banks will not forgive those payments (although they will often forbear — postpone — payments until the crisis abates).
Ask your landlord for a temporary reduction in rent until you are legally allowed to reopen your business. The amount of the reduction should be keyed, if possible, to the amount of forbearance your landlord’s mortgage lender has granted the landlord. For example, if the mortgage lender has agreed to a 50 percent reduction, you should be able to get a 50 perent reduction in your rent.
If you cannot afford to pay rent at all (and if you were operating on such a tight margin, shame on you), ask your landlord to allow you to suspend the next three months of rent payments with the understanding that when you are allowed to reopen your business, those payments will be amortized over the next year (or two years, if your landlord isn’t worried about mortgage payments) of rent payments. In an extreme case, your landlord may be willing to back-end the deferred rent payments — adding them at the end of your current lease term — but that may be a tough sell to a landlord who is not getting much cooperation from the mortgage lender.
In a worst-case scenario, your landlord will not budge and will insist that you continue to make payments on time even though your business is shut down. Talk to a local attorney about a possible force majeure defense once you are allowed to reopen your business. Now, your lease probably doesn’t contain a force majeure clause — most leases don’t, or if they do, they are for the benefit of the landlord only. And the law in most states is that force majeure does not excuse you from performing under any contract unless there is a clear force majeure clause in the contract that specifically includes the situation that is preventing you from paying rent.
Having said that, however, I have to believe that judges will be interpreting those legal rules very flexibly in coming months due to the immensity and scope of the government-mandated shutdowns. If a global pandemic and government-mandated shutdown of your business for several months does not constitute a bona fide force majeure excuse for not performing under a contract, what will?
Now let’s talk about franchises. If you are working with a reputable franchisor, it already has a plan to help its franchisees get through the pandemic and has already informed you about it. Call your franchisor, and ask bluntly what it plans to do to help franchisees.
If your franchise royalty payment is a percentage of gross sales, then you are in fairly good shape. Any percentage of zero sales is zero, and you will not be obligated to pay anything to the franchisor until your business resumes.
The problem is with franchises that require a minimum royalty payment each month regardless of sales. If you are paying these, you should ask your franchisor to forgive or waive them entirely until you are allowed to reopen your business. In my humble opinion, franchisors have no reason to deny this without a darn good reason — if they do, ask to have the payments amortized over the next year once you are allowed to reopen.
Whatever you negotiate with your landlord and franchisor, GET IT IN WRITING. Ask your attorney to prepare a short (one- or two-page) amendment to your lease and addendum to your franchise agreement with the details. Your attorney may even be willing to give you 90 days to pay your bill — if you ask nicely.
Cliff Ennico (firstname.lastname@example.org) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
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