There is no denying that the COVID-19 pandemic will have an impact on the U.S. economy, especially as disruptions to supply and demand continue. In the wake of all this uncertainty, many commercial landlords and tenants have expressed a growing sense of anxiety.
During this time of rapid change, it is important for commercial landlords to protect their own interests while serving their tenants’ best interests as well. Below are five important considerations for commercial landlords when navigating tenant issues related to COVID-19.
1. Review Loan Documents Before Issuing Tenant Relief
As small businesses like bars, gyms, and non-essential offices come to terms with mandated closures, many tenants may begin seeking rent relief from landlords. Before agreeing a reduction in rent, commercial landlords should first review the project’s loan documents.
These papers may include statements about financial agreements required by contract to be maintained during the term of the loan. Loan documents may also state whether or not the modification or termination of a lease is permitted, including acceptance of less than the stipulated rent.
2. Document Rent Deferrals Carefully
If a commercial landlord does agree to accept reduced rent from a tenant, this reduction should be clearly documented in a lease modification agreement. Additionally, this agreement should outline a deferral—rather than an abatement—of rent for a specified period of time, with the stipulation that unpaid expenses will be repaid in the future.
We recommend that landlords request financial information from the tenant before signing an agreement of this nature, to assess their ability to repay deferred rent.
3. Consider the Effects of Force Majeure
Most commercial leases include a force majeure provision. This clause addresses improbable, unforeseeable events beyond either party’s control that prevents them from performing contractual obligations. Many force majeure provisions use catch-all language to describe these events, which may include public health emergencies.
That said, inclusion of a force majeure clause in lease terms does not guarantee rent relief for the tenant. It also does not guarantee that landlords are exempt from performing required duties such as maintenance, although it may in certain cases. Commercial landlords should consider how a force majeure could provide protection under the terms of the lease.
4. Prepare for Co-Tenancy Concerns
Co-tenancy provisions in retail leases may provide tenants with certain rights—including rent relief—in the event that certain co-tenants (or a certain percentage of co-tenants) are not open and operational for a given period of time. This is especially true in shopping centers and strip malls, where the presence of restaurants, bars, fitness centers, and entertainment venues are often a large part of a property’s appeal for tenants.
With forced closures in the wake of COVID-19, tenants may be gearing up to state a violation to co-tenancy provisions. That said, a force majeure (such as a global pandemic) may not immediately trigger a co-tenancy violation. Commercial landlords should review these provisions and keep them in mind when negotiating rent relief with tenants.
5. Think About Early Lease Terminations for Problematic Tenants
Unfortunately, commercial tenants that were already struggling financially before the coronavirus outbreak will likely be in a far worse position after this crisis. A mutual early lease termination may be the most suitable option for both parties in this case, rather than rent deferral (which is unlikely to be repaid per agreement terms) or eviction (which may not be supported by the courts at this time).
This may feel like a risk, as a replacement tenant may not become available for some time. However, footing the bill for a tenant who can’t pay presents a major financial risk as well.
The more that landlords and tenants are able to work together during these unprecedented times, the better prepared both parties will be to shift and adapt as needed.
Please don’t hesitate to reach out to our office directly at 216-525-1200 for help navigating all your commercial real estate needs.
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