Lower the Rent During the Coronavirus Pandemic

Originally published in The Wall Street Journal / WSJ Opinion.

By Steve Levitt, Sendhil Mullainathan, Jeff Severts, and Richard Thaler.

April’s rent is due, and the great majority of small businesses will have trouble making their payments. The situation is unprecedented. And just as the health-care system has been overwhelmed by Covid-19, the legal system will buckle without a simple means for commercial tenants and their landlords to renegotiate leases.

In typical times, when a business tenant isn’t making lease payments, the landlord either negotiates with the tenant to work out alternatives or begins eviction proceedings. Both these paths require time, effort and legal expenses. We don’t have the capacity required for millions of tenants to renegotiate their contracts simultaneously, or for the court system to process millions of evictions.

Mass defaults are as bad for landlords as for tenants. Even in the best times, commercial properties often sit empty for several months awaiting a new tenant. In this crisis, the prospects for finding new tenants soon are very poor. It’s in everyone’s interest to find a way to renegotiate lease terms quickly.

The Cares Act stimulus offers forgivable loans to help small businesses cover their expenses. But no one knows yet whether the machinery of government can move fast enough to process applications from millions of businesses over the next days and weeks.

We believe there is a simple solution that works in the best interests of commercial tenants and landlords. It’s a quick, cheap, easy, legally binding way to renegotiate leases en masse and relieve the intense cash-flow pressures on small businesses.

With the economists Steven Levitt and Sendhil Mullainathan, we created a simple, customizable one-page lease addendum, available online at centerforrisc.org/lease. We got input from lawyers representing both tenants and landlords, with the effort led by Beth Kregor, director of the Institute for Justice Clinic on Entrepreneurship, and lawyers at Washington Prime Group. The template can be easily appended to commercial leases. It can be filled out in minutes, saving precious time and resources.

The basics of the contract are as follows. For the next three months, normal rent payments are suspended, and the original lease is extended by three months. Landlords and their tenants need only agree on the percentage that the rent will be reduced for those three month, what fraction of that reduction will be deferred until later in the lease, and what part will be forgiven (“abated.”) Regular rent payments resume on July 1, with the deferred rent payments spread equally over the remainder of the lease.

As a default, we are recommending that tenants pay only 10 percent of their usual rents during the relief period. This small payment gives almost complete relief to beleaguered small businesses, but is a sign of good faith and will help landlords cover some of their costs. We further recommend that for rent not paid now, 90 percent be deferred (meaning it will be eventually paid) and 10 percent abated (meaning it is permanently forgiven by the landlord).

There are many aspects of the Covid-19 pandemic that are incredibly complex. Lease renegotiation does not need to be one of them.

Steve Levitt, Sendhil Mullainathan, and Richard Thaler are professors of economics at the University of Chicago. Jeff Severts is the executive director for the Center for RISC at the University of Chicago.