Part One: COVID-19

February 3, 2021 | Written by: Robyn Swihart, Owner

This two-part post is not intended to re-hash the devastating effects of COVID-19 on the retail landscape but rather to examine how its occurrence impacted landlord and tenant relations and lease conversations.  Landlords and tenants are working through myriad issues of back rent collection and how to address future pandemics within the lease framework.  Prior to 2020, few commercial leases expressly anticipated the occurrence of a pandemic.  The topic has now become a hot button issue, discussed below from a landlord perspective. A future blog will address the same topic from the view of a tenant. 

What should your expectations be as a landlord?  Hopefully you legally documented any rent deferral or abatement provided to current tenants.  If not, it’s not too late to seek reimbursement or leverage a balance being carried by your tenants.  First, on an individual basis, you should raise the issue of back rent immediately, with appropriate documentation, along with a proposal for payback.  A good tactic may be offering a repayment schedule beginning next pay period and lasting through the end of the term.  Or, if you are approaching a renewal, remind the tenant of your charity, and make it known that you expect repayment before taking back possession of the space.  Depending on the vacancy in your submarket, your prospects of re-leasing the space if your current tenant vacates, and other market factors, it may make the most sense to relax your stance and move forward.  Leverage your concession into your renewal conversation. And of course, acknowledge that excusing payback may be preferable to having no tenant or to chasing after rent in litigation.

Going forward, many tenants are taking a cautious approach to growth, relocations, and new store planning. They are requiring contractual provisions that stipulate their responsibilities to pay base rent, additional rent, and remain open during a future pandemic. So how can you best protect your interests? It is always advisable to consult your attorney, paying particular attention to force majeure and business insurance clauses; however, here are some of the questions you should contemplate:

1. Any written future pandemic rent concessions should come with qualifiers.  Can the tenant prove that sales are actually down?  Require tenants requesting pandemic relief to show harm to their sales.  Evaluate the tenant’s industry sector and understand exposure risks during periods of shutdowns and restrictions. Some businesses thrived during COVID-19, with positive sales comps (for example, medical providers, hardware stores, packing and shipping retailers, veterinarians, and some fast casual food concepts with robust online ordering platforms and drive-thru locations.)  

2. Require the tenant to avail themselves of national and local government relief programs like the CARES Act and Paycheck Protection Program. 

3. If you have a mortgage, review your loan covenants.  Your loan obligations may require lender consent to amend leases, and a tenant’s failure to operate or pay rent may trigger a loan default.  

These considerations should frame your negotiations. While the industry guidance tends to suggest denying any and all requests for pandemic language in leases, the reward of securing or retaining a desirable tenant may be greater than the risk of accommodating a reasonable relief request.

Disclaimer:  This article should not be seen as legal advice.  Please consult your attorney before you rely on this information.