In recent weeks, every commercial landlord and business owner has scrambled to develop a strategy for responding to COVID-19 hurdles. I have received numerous inquiries asking what can be done in this novel situation when tenants are required to pay rent for commercial spaces they cannot occupy by no fault of the landlord or their own.
This blog post is not designed to tell you what your legal rights are under a commercial lease or what legal arguments you might consider making. Instead, I lay out some considerations for both landlords and tenants as they try to develop mutually beneficial solutions that avoid breach of contract claims and otherwise degrades their long-term relationship.
Government Funding: Many of the programs recently released by federal and state governments allow businesses to use stimulus funding to pay rent. Commercial landlords should be encouraging their tenants to apply for those loans most of which are being offered on a non-recourse basis. To learn more about available programs click here.
Insurance: Commercial leases that contain force majeure clauses that arguably cover pandemics or governmental restrictions sometimes require the tenant to first make a claim to their insurance carrier before they will be absolved from rent obligations. Many clients think making an insurance claim would be a waste of time because their insurance carriers and brokers are advising that COVID-19 would not qualify as a casualty triggering business interruption coverage. What is covered under the policy and whether the tenant has made the requisite insurance claim required in a commercial lease are two separate inquires. Therefore, clients should consult with counsel and professional disaster claims consultants to follow the requirements of the lease.
Lease Modifications: Landlords and tenants should think creatively to modify their agreements in the short term (through lease amendments, forbearance agreements, and side letters) in a way that allows the landlord to continue to cover operational costs while not bankrupting their tenants who are already suffering from precipitous declines in revenue. Some potential solutions to consider include:
- Modifying payment frequency from monthly to quarterly or vice versa to help tenants manage cash flow.
- Agree tenant is not required to pay rent while the governmental restrictions are in place, but tenant agrees to pay landlord’s monthly operating expenses in the interim.
- Agree tenant is not required to pay rent while the governmental restrictions are in place, but tenant agrees to extend the lease for the time period the restrictions were in place.
- Agree to a reduced rent while governmental work from home restrictions are in place in exchange for the tenant’s agreement to increase the rent for the remainder of the lease term to account for the reduction.
- Agree rent will be paid out of security deposit in exchange for agreement that tenant will not need to replace the deposit until after the work from home restrictions are lifted.
- Agree to an allowance for space improvements and/or refurbishment of the tenant’s furniture, fixtures, and equipment as an incentive to encourage the tenant to continue paying rent.
Look at Your Credit Facility: Landlords must look at their lending documents to ensure they are obtaining proper consents to lease modifications and rent relief from lenders and other third parties before making any rent relief decisions. Tenants need to understand that many landlords need to get buy in from their lenders and should be patient in the process.
As many of us sit at home and contemplate what life will be like after COVID-19, ask yourself this: Do you want to spend your newfound freedom litigating over your commercial lease for the next 5 years in a court system that will be inundated with claims and chasing down parties who will have gone bankrupt or out of business?
For as fun as that sounds, channel your inner Axl Rose and remember that all we need is a little patience. And to the extent you don’t think you can do so on your own, Russo Law LLC will happily back you up.
Russo Law LLC deploys unparalleled training and modern technology to guide investors, businesses, and executives efficiently through corporate, contractual, commercial real estate, and litigation issues. Call (+1-929-262-1101) or email today to learn more.
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