Renegotiating Contracts: How to Craft Win-Win Scenarios
There is little doubt that the global spread of an unknown virus unleashed unprecedented problems for American business, and the impact on commercial real estate is both wide and deep. But beyond the problems that every developer, landlord or tenant must face, there are also opportunities that can be identified.
There is widespread agreement that recovery will not only take time, but that those businesses with the ability to pivot toward innovative new solutions will have a better chance of survival in what is destined to become a new normal.
While some businesses are already well-positioned to thrive in a changed and changing economic environment, others are scrambling to identify the first needs to be addressed. A primary concern is the status of existing contracts, whether they are buy-sell agreements, leases, or contracts with suppliers and subcontractors.
Acknowledging that the pandemic has had a devastating effect on business is not difficult. The difficulties extend across all levels of business, from the executive suite to employees to the man on the street. Even in these uncertain times, defaulting on a contract should be the last available option. Here are some strategies to consider:
Analyze Your Business Position
The first step is to take stock of your current situation, and to look at the viability of all possible solutions. While current cash flow may be a primary worry, business leaders should take into account equity, income, borrowing power and future projections. Be realistic; in this case, look first at "worst case" possibilities rather than relying on unfounded optimism. Don't ever give in to pessimism, but also don't ignore the facts.
It goes without saying that what you do in the present affects what happens in the future. Always be prepared to play out "If, then" solutions. Look at options from both sides. An owner might ask, "If I grant six months rent free, what effect does that have on cash flow?" Or, as a tenant, think: "If my landlord reduces rent by 30% and extends the lease term, what else can I do with the money?"
Once you can see some options, develop two or three possible alternatives that have promise. Flesh out those proposals and strive to develop your best possible outcome. Develop your "Ask" based on well-thought-out scenarios.
Understand Your Leverage Position
Investors, developers, landlords, tenants, subcontractors, suppliers, and service providers all have a vested interest in success. Understand the role you play in the overall picture and be willing to explore ways to alter and refine that role in the future. Rather than thinking "outside the box," simply abandon that box entirely, and chart a new path.
Be Willing to Give
A win-win strategy requires that both parties come to the table willing and able to give a little. Contract negotiation should be a fluid dance between partners committed to mutual satisfaction, not an adversarial relationship.
Never Underestimate the Value of Collaboration
Solutions may not come easily, but if everyone involved believes in the process, chances are good that a workable solution can be achieved. Landlords and tenants, buyers and sellers, owners and contractors should be able to understand and respect the other's perspective, and to work together to forge a new understanding -- and sign a new contract -- that is mutually beneficial.
Negotiation is an art form, and renegotiating contracts to the benefit of everyone involved is a skill that can make a lasting difference to future profitability. It is never one-sided, however, and those who successfully address contract renegotiation sooner rather than later will be better positioned for recovery. In terms of pandemic response, those who adopt a wait-and-see posture will lose valuable time. Doing nothing is typically not an option.
Approach each difficult task realistically; know the facts and be honest about your needs and expectations. Not all negotiations will result in an equally happy outcome, but the effort is worthwhile. As the country recovers from the effects of the economic shutdown, some will rely on the validity of the old refrain that "a rising tide lifts all boats." However, the time for innovative ideas and for taking the first step has arrived.