In our last blog, we discussed contracts during the coronavirus pandemic. Today’s blog will get a little more specific to discuss commercial leases. These are quickly becoming a point of contention among many business owners. This is because of recent pressures with the pandemic as well as long-standing concerns that have long predated it.
Keep in mind that many individuals’ business ventures have been recently shuttered. The reason is to prevent the spread of a viral infection. This reduces the burden on hospitals but increases it for various enterprises.
Impact On Retail Leases
More and more “non-essential” businesses –bars, restaurants, gyms, venues– are being ordered to close to mitigate community spread of the Coronavirus. Owners in the meantime are concerned about overhead. Primarily, they need to assess employees and commercial rent.
Business disruption is completely certain for these businesses, and many commercial landlords and tenants are calling to ask about their options. Expenses have not just suddenly stopped.
Meanwhile, property owners and managers have their own situations to be concerned about. They also have to deal with their own overhead at a time while not generating much positive cash flow. That’s creating a dangerous situation where people aren’t capable of generating significant sources of income either way. People have countless disagreements over being able to meet the terms of their existing commercial leases.
How Business Disruption Is Affecting Commercial Landlords
Naturally, both sides are also deeply concerned about their own interests at a time when they might very well feel threatened by external forces that they aren’t able to control. That has led to concerns by property managers that they might also not exactly be able to meet their own obligations. They don’t want to have to worry about the possibility of litigation or contract breaches either.
The commercial landlords are concerned about cash flow for purposes of meeting their mortgage/loan requirements and any payroll, whereas the tenants are concerned about meeting rent obligations and payroll obligations. Both have valid concerns, and both need to consider the long term effects of their actions.
While many employees are furloughed at this time, essential staff still have to continue operating. Countless businesses have to continue paying at least some portion of their personnel. That means payroll expenses have continued to accrue. This is necessary despite the fact that numerous individuals aren’t currently going to work in a normal fashion.
Remember that a number of groups have allowed members of their own staff to continue fulfilling at least some duties from a home office, using the Internet or other networking service to stay in touch. This personnel might have to continue drawing a salary for the foreseeable future, which is a problem for cash-strapped companies. That’s leading to some very difficult decisions that managers are starting to have to make.
Options For Landlords
In the current climate, it may be in the best interest of both parties to try to come up with creative solutions to avoid litigation and defaults by various parties of various agreements. There are many concerns to address from the start.
Can You Be Evicted During The Pandemic?
Could a landlord technically sue to evict a tenant for nonpayment or failure to continuously operate? After following the statutory prerequisites, of course. In a more normal market, the landlord would evict the noncompliant tenant and get another one. This is not a viable option for landlords in the current situation.
Furthermore, the tenant may have invested money into a build-out and other infrastructure. They don’t want to lose that during such a crisis.
Reread Your Lease Agreement
The first, and most important step, is to review the lease agreement. Most commercial leases will not carve out obligations relating specifically to a communicable disease. They will, however, offer guidance on the related obligations of the parties. This could help the parties reach a resolution.
- Does the lease have a requirement for continuous operation? If so, are there exceptions?
- Does the lease contain any provisions regarding rent abatements? If so, then what are these provisions and for how long may they are relied on? Is there any specific time limit to the possibility of an abatement?
- Is there a force majeure clause that allows either of the parties to not perform under the agreement? (See our previous blog post about contracts).
- Does the lease require any insurance that could cover the loss (like business interruption insurance)? Is there a provision indicating whose policy would cover a loss of this sort? If so, what does the policy cover and what are the exceptions?
- What does the lease define as a “default”, and what are the parties’ rights in the event of a default? In some cases, the parties involved might have substantial rights in this respect. They might not have much of an option in others.
- Does the lease address utilities and obligations regarding the provision and payment of utilities? If so, are there any ancillary contracts that need to be reviewed? Is there any provision for a situation like this?
It might have seemed unusual to consider it in the past. In this present time, there are certainly some contracts that do have clauses defining such unprecedented cases.
- A desperate tenant may also try to make novel arguments under casualty provisions, condemnation, or eminent domain provisions. Any provisions addressing this in the lease should also be reviewed.
The second step is for landlords to review their loan documents. Doing so ensures they are aware of their obligations under the loan. They can then assess what they can or cannot do when coming up with solutions.
There may be certain debt-to-income ratios, occupancy requirements, and other covenants. These may require a certain amount of rental revenue on a monthly or annual basis.
Any deals worked out with tenants will need to comply with these requirements. Alternatively, the landlord may need to work out its own deal with the lender. If the strain to keep compliant with the loan requirements becomes great enough, there may be force majeure or other provisions. Landlords can rely upon them to avoid judgment or foreclosure.
Some options may include:
- Mutual termination of the lease
- Short term rent abatements, if there is a government closure or curtailment of hours or other operational conditions.
- Both landlords and tenants should consider the availability of emergency monies and loans to maintain obligations. Ideally, they can collaborate to find stopgap funding so that leases are maintained.
- Some tenants may want to negotiate with their landlord for the right to file their own eminent domain action to recover if the government has “taken” the property where they operate their business.
In the end, neither the landlord nor the tenant can expect to operate as usual—there is a new normal that requires unprecedented collaboration to mitigate damages and ensure the best opportunities for quick economic recovery after this pandemic passes. Calling defaults and taking tenants to court may not be in the best interests of all involved.
Assess Your Lease Provisions With Trembly Law
A landlord or a tenant should navigate this terrain with legal counsel. Furthermore, any such workouts/deals need to be put into writing with the other party or lender to ensure they are enforceable, to specify the duration of the deal, and clarify whether it will revert to the original deal upon the existence of certain conditions.
If you find yourself in this predicament, please contact Trembly Law Firm to speak with a knowledgeable attorney who can review the relevant documents with and help propose potential solutions to the other parties involved.