Difficult Leasing Decisions for Tenants During the Coronavirus Crisis

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Disruptions from the coronavirus (COVID-19) pandemic will have a lasting impact on industries worldwide. Commercial real estate tenants are being forced to make difficult decisions to adapt to these sudden changes, especially retail tenants faced with forced closures and limited operational ability due to governmental orders. Tenants should immediately begin a dialogue with landlords regarding the following response actions to ensure as positive an outcome as possible under the circumstances.

1.  Rent Payments

Tenants are facing upcoming April rent payments uncertain of their ability to conduct normal business in the coming months. It is unlikely that tenants will be able to rely on Force Majeure provisions in their leases to withhold rent payments. Tenants should consider discussing one of the below options with landlords:

• Rent Holiday - Deferral of rent payments for a short period (e.g. 1 to 3 months). Tenant could repay the deferred amount by spreading out smaller payments during the remainder of the lease term. Alternatively, the lease term could be extended for the same length as the rent holiday and the tenant could repay the deferred amount at the end of the extended lease term.
• Rent Reduction - Payment of reduced rent for a short period. The reduced rental amount could also be repaid by the tenant in the same manner as described for a rent holiday.
• CAM Only Payments - Payment of only Tenant’s share of common expenses, taxes and insurance for a short period with no payment of base rent.
• Security Deposit Application - Application of Tenant’s security deposit toward upcoming rent payments without a requirement to replenish the security deposit. Note, if tenant has given a letter of credit security deposit, then a landlord draw against the letter of credit will trigger payment obligations to the bank which issues the letter of credit.

2. Toll Critical Dates

In response to the public health need for social distancing, municipalities are closing functions and limiting staff to only essential services. This has brought the permitting and entitlement process to a standstill. Moreover, these closures have made it difficult to obtain searches of government records for due diligence purposes. Tenants should discuss tolling critical lease deadlines, including:

• Due Diligence Periods
• Permitting/Entitlements Periods
• Tenant Build-Out Periods
• Rent Commencement Dates
• Deadlines for Opening Business to Public

3. Impossibility of Performance

Mandated government closures may make it impossible for a tenant to have access to its premises, comply with “continuous operation” provisions or otherwise perform typical lease obligations. In these instances, asserting force majeure as a reason for non-performance is appropriate and should be communicated to the landlord.

4. Going Dark / Co-Tenancy Provisions

As the situation evolves, some leases might have “going dark” and co-tenancy provisions which can be invoked. Alternatively, in the case of shopping malls and other properties which may be subject to governmental shut-down (with some property owners voluntarily shutting down), these concepts may be part of tenant discussions with landlords.

Conclusions

Tenants with multiple office or retail locations should develop a uniform strategy for their locations to make communication with many different landlords in a short time period feasible. Given the timing pressures, tenants should consider preparing a single form letter to send to multiple landlords.

Tenants should also consider banding with other tenants at the same property and approach the landlord with a unified front.

The issues described above are by no means an exhaustive list. Regardless of the issue, early communication with landlords is critical for tenants navigating the ever-changing economic landscape. Open dialogue with landlords is the best path to cooperation so that the parties can agree to a mutually beneficial path to ride out the storm.

If a tenant is in the process of negotiating a new lease, then drafters should include a pandemic as a Force Majeure event. In addition, drafters should include provisions for tolling of rent payments, due diligence periods, permitting/entitlement periods, build-out periods, and other critical dates to address the lessons learned from this unprecedented pandemic event.