The coronavirus (COVID-19) pandemic is forcing commercial landlords and tenants to tackle complex business and legal decisions. So even if there is no immediate crisis, both parties should be reviewing their leases right now.
As the economic impact of COVID-19 continues to grow, tenants who are suffering through less business activity or being forced to close their doors will not want to pay or may be unable to pay the required rent. For landlords, the challenge is to determine what concessions may be available and acceptable to their lenders.
Review Your Lease Provisions
In most cases, the terms of the lease will be the starting point for landlords and tenants. While states like New Jersey have enacted new laws that prevent residential evictions during the pandemic, they do not excuse the payment of rent. In addition, such laws do not address commercial properties.
In reviewing a lease, the starting point should be any force majeure provision. The provision relieves the parties from performing specified duties under the lease in certain circumstances. The circumstances include those deemed beyond their control that make performance inadvisable, commercially impracticable, illegal, or impossible. Examples include natural disasters like hurricanes, floods, earthquakes, and other “acts of God.” However, they also apply to manmade disasters including include war, terrorism, civil disorder, supply shortages, and labor strikes.
With COVID-19, the key is to determine whether “disease outbreaks, "epidemics," "pandemics" or the like are considered force majeure events under the terms of your lease. However, even if the provision does apply, it typically only governs non-monetary obligations, such as ceasing operations on the premises. Accordingly, it would not excuse the non-payment of rent.
Depending on the circumstances, other lease provisions may be applicable. If the landlord was required to close the building or the tenant was required to shut down operations at the building, operating covenants, rent abatement provisions, co-tenancy requirements, and right of access guarantees may be relevant.
Start a Conversation Now
Landlords and tenants should start a conversation about potential short-term concessions, such as rent abatements or application of security deposits in lieu of rent before the situation becomes dire. For tenants, being proactive will demonstrate your commitment to fulfilling your obligations under the lease. To make your case for concessions, be sure to document the hardships you are suffering and have a proposed plan for dealing with them.
In some cases, the parties may be able to come up with a reasonable and practical solution that everyone can live with in the short term. If landlords and tenants do reach an agreement, it is imperative to properly document any lease modifications in writing. Given the uncertainty surrounding the pandemic, landlords and tenants should also be sure to preserve their rights.
Don’t Forget About Lenders
While landlords may be sympathetic to tenants’ rent issues, they are often restricted by applicable loan documents from granting certain concessions. For instance, landlords may be required to maintain a certain level of income to meet the loan requirements. In many cases, loan documents do not allow such changes in the leases without approval and have strict income to loan payment coverage ratios. The result is the need for legal counsel to coordinate between the three parties to avoid lease default, loss of the tenant, and default under the applicable loan.
How We Can Help
The attorneys of Scarinci Hollenbeck’s Commercial Real Estate Group are available to assist all entities, including landlords, tenants, and lenders. We can help you navigate these novel and complex commercial leasing issues and also help you explore additional solutions, such as the availability of insurance and financial assistance programs.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Victor Kinon, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.