The Impact of COVID-19 on Existing Commercial Leases
As the COVID-19 pandemic continues, landlords have increasingly received communication from tenants requesting rent relief and, in some circumstances, lease termination. While there has been discussion to suspend the ability to evict commercial tenants, such restrictions have been generally limited to residential leases to date.
Continuous Operation Covenants
Many leases have continuous operation covenants that tenants must abide by, requiring that tenants to be open for a certain period of time each day. Landlords may want to consider temporarily relaxing enforcement to help a particular tenant’s operational limitations. Such clauses may also have exceptions for emergencies or government orders, which could apply to many commercial tenants given the circumstances.
Abatement or Deferment as an Option
If offered, the types of rent relief by landlords can be diverse and tailored to each property and tenant’s unique circumstances. Landlords can agree to abatement of rent entirely, or defer rent with repayment on a certain date or in accordance with a specific payment plan. The parties can also add additional months to the end of the existing lease term at a higher rate. Abatement or deferral can apply to minimum rent only or also to common area expenses, depending on the circumstances. However, tenants will usually still be obligated to pay their own utilities. Generally an abatement or deferral period should be established upfront and not tied to an unknown period of pandemic or “stay home” orders, as parties can always agree later to extend the rent relief period.
Parties could incorporate concepts, particularly in retail leases, that allow the landlord to recoup some lost rental when the economy rebounds—this can be through a percentage rent concept or other profit-sharing methods. Landlords should also encourage tenants, before entering into alternate pay structures, to contact their insurance providers as to whether there may be coverage under a business interruption policy. However, property damage and business interruption insurance do not typically cover losses arising from pandemics and diseases. Instead, such policies are typically limited to providing coverage for losses from physical damage to a property.
When Access to a Premises is Prohibited or Restricted
A typical lease states that rent payment is an independent obligation from landlord’s obligations under the lease. Normally, there is no right to offset rent under a lease unless this right has been negotiated into the lease specifically. A landlord-favorable lease tend to say that landlords have no liability—and that there will be no rent offsets—for closure of the building or for failure to provide services, access and utilities in emergency situations, as long as the landlord uses reasonable efforts to reinstate the building after the situation.
The impact of the pandemic on business activity has led to an increase of tenant requests to seek temporary rent relief from landlords. Landlords will need to determine if their cash reserves and lenders will allow them to negotiate short-term rent relief, in particular for tenants who cannot operate their business remotely. For any questions you have about navigating your business through the coronavirus crisis, contact the attorneys at Wilkerson Hegna, PLLP.