The COVID-19 pandemic and resulting governmental intervention (such as social distancing mandates and Gov. Desantis’ Safer-at-Home Order which closes non-essential businesses through April 30th) have caused many businesses to close or significantly scale back operations, thus resulting in many not having the income stream necessary to meet their obligations, including the payment of rent and other lease related expenses. Consequently, many distressed tenants have requested some form of relief or concessions from their landlords.
The relief or concessions typically sought or negotiated include:
- Rent abatement, which essentially means rent forgiveness, for an agreed period of time.
- Rent deferment, which means delaying the payment of rent for an agreed period of time. For example, the parties may agree on a deferral of rent for a period of 90 days and agree that the tenant is automatically charged with a default and a late payment fee if such deferred rent is not timely paid.
- Rent amortization, which means recalculating the periodic rent over the lease term so the landlord is fully paid by the end of the term.
- Amending the lease to allow terms more favorable to the distressed tenant, such as allowing for the assignment of the lease or the use of the premises for a purpose not affected by COVID-19.
- Terminating the lease, which may or may not include a lease termination fee or deposit waiver.
When confronted with a tenant request for relief, the landlord or its attorney should first examine the lease (the contract) as it is the guiding reference in determining the rights and obligations of the parties. A lease examination will establish the baseline for negotiations and allow the landlord to be informed throughout the process.
In many instances, especially in light of the unprecedented COVID-19 pandemic, a lease amendment which addresses the tenant’s requests will be beneficial to both parties and allow for a prompt, definite and cost-effective resolution. In considering a lease amendment, a landlord should:
- Consider requiring a confidentiality agreement at the outset to prohibit the tenant from disclosing the negotiations and terms to others (thereby avoiding a precedent for other requesting tenants).
- Review (again) the lease to determine which provisions may need to be modified, both to address the tenant’s requests and to protect the landlord’s interests.
- Review any mortgage or financing documents to determine whether they restrict lease amendments or landlord concessions (such as a covenant restricting less favorable rent terms or requiring a certain income to debt ratio).
- Review both tenant and landlord insurance policies for applicable coverage, such as business interruption, civil authority, and loss of rental income coverage.
- Consider requiring the tenant to provide updated financials and cash flow projections to justify a lease amendment and establish the tenant’s ability to satisfy its obligations going forward.
- Consider requesting the tenant to seek all available governmental financial assistance (which may mitigate or avoid the need for the requested relief).
- Require any amendment to be in writing and signed by all parties and guarantors. The written amendment should be specific and thorough to ensure enforcement and avoid later confusion.
In return for providing relief, a landlord may seek certain concessions from the tenant. These may include:
- Increased tenant financial reporting obligations;
- Additional remedies upon a tenant default;
- Additional security and/or guaranties; and
- Modifying or removing specific tenant rights such as purchase options, early termination rights, and rights to sublease or assign.
Further, by accommodating a tenant, the landlord should consider seeking certain protections in the lease amendment. These may include:
- Estoppel language confirming that the landlord is not in default;
- Indemnification of landlord for any liability related to COVID-19 and the use of the premises;
- A requirement that the parties assist each other in seeking applicable financial aid due to COVID-19;
- A requirement that the tenant comply with all CDC and other governmental guidelines in the occupancy and use of the premises;
- A requirement that the tenant pursue all potential insurance claims related to COVID-19 and fully cooperate with any claims pursued by the landlord;
- A waiver of all defenses of the tenant up through the date of the lease amendment; and
- A waiver of any and all COVID-19 related claims by the tenant.
Faced with the unprecedented effect of COVID-19 on many commercial tenants, the uncertain manner in which courts will apply COVID-19 related eviction defenses, the suspension of evictions through May 29, 2020 (and possibly further), the anticipated backlog of court cases, and the potential reputational harm for attempting to evict a tenant during a national health crisis, a landlord may have an extra incentive to negotiate a viable lease amendment.
Many of the commercial lease issues related to the COVID-19 pandemic are unprecedented and unique. Prior to engaging in commercial lease negotiations, we recommend contacting your attorney for guidance and advice specific to your circumstances.
Scot B. Copeland is a board-certified real estate attorney available to assist you in commercial leasing and real estate matters. He may be reached at firstname.lastname@example.org or 850.460.8916.