Rent Deferrals for Commercial Leases during COVID-19

The coronavirus (COVID-19) pandemic has impacted all industries, including real estate. This is the first blog post in a series of blog posts describing some experiences I have encountered in the real estate world relating to COVID-19 and how I have counseled my clients to handle same.

Because of businesses being closed, shutting down, or having less customers and/or cash flow, many commercial tenants cannot not make their monthly rent payments under their leases. We have had clients (landlords and tenants) on both sides of this issue.

Whether we represent the landlord or the tenant, the first step is always to gain all the facts of the situation and assess how and if the terms of the lease apply or are helpful in resolving the issues. Leases are sometimes silent on or have vague Force Majeure provisions that leave room for interpretation on both sides. We encourage our clients to have productive and healthy conversations with their counterparts. Landlords usually do not want to have a vacant space or spend time and money in litigation, and tenants usually want to work out a resolution to be able to stay in their space. The business decision makers know what is best for the future of the leasing relationship and can often come to an agreement on modified terms that work for both sides. This is also an opportunity for both sides to renegotiate certain terms of the lease to their benefit. We have seen modifications in term, rent, usage restrictions, co-tenancy clauses, and even mutual terminations of leases.

When it comes time to drafting an amendment, from the landlord side we recommend adding language to make clear that whatever modified terms and/or accommodations the landlord is providing is simply a one-time occurrence. I.e. deferred or abated rent today does not give tenant the right to deferred or abated rent in the future. It is also important to have tenant acknowledge that there are no existing landlord defaults and to agree to release language for any possible claim tenant has against the landlord. Finally, we recommend landlords add non-waiver language, acknowledging it has not waived any rights it may have pursuant to the lease or applicable law.     

From the tenant side, it is advantageous to try and negotiate as many positive terms as possible. In addition to the revised business terms the tenant seeking, we advise tenant clients to either add or modify the existing Force Majeure provision in the lease to account for COVID-19, similar pandemics, and any other issue which may lead to government mandated closures/quarantines. This will help protect the tenant in the future if similar situations arise. We also try to have tenant preserve as many of its rights as possible, so we try to negotiate against any of the language landlord may try to include as described in the preceding paragraph.

The above is a basic introduction to lease negotiations and modifications that landlords and tenants are experiencing as it relates to COVID-19. Every situation is different and demands the proper attention and handling to navigate these uncertain times. If you are a landlord or tenant and want to discuss any of the above or have a similar situation and would like to discuss with a real estate attorney, please do not hesitate to contact me.

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