The current health, social and economic conditions related to the coronavirus pandemic are exerting tremendous pressures on contractual relationships between commercial concerns, not the least of which is the landlord-tenant relationship. As April 1 has come and gone, arguably the first rent payment due date since the acknowledged outbreak of the pandemic, many tenants have indicated that they will either be seeking deferrals of rent or be completely unable to pay. In other cases, landlords have been pro-active and have offered a variety of rent relief structures (e.g., half rent, base rent only, CAM only, rent deferral.)
Landlords of varied asset classes such as industrial, office, retail (QSRs, being a subset) and hospitality concerns may be facing significantly different issues, but the following list should be reviewed by all landlords before entering into any such lease modifications with tenants. That will promote the viability of the business relationship with tenants and ensure landlords have a strong basis for navigating the impacts of the coronavirus.
Check-in with the Bank
Assuming they have not already, landlords should immediately begin dialogue with their mortgage and other lenders to determine whether and to what extent the lender is willing to offer forbearance or payment deferrals. (Many lenders have busily developed new standardized forbearance agreements providing borrowers with short-term payment relief). Most commercial loan documents, either in the mortgage or assignment of leases and rents, contain provisions limiting or prohibiting lease amendments or landlord concessions without lender consent. Understanding what the lender is prepared to offer the landlord will inform negotiations with tenants.
Review the Lease
- Landlords should review all of their leases with an eye toward provisions that might be affected by the pandemic and the various governmental closure orders (a/k/a civil authority orders). Key among these pertain to force majeure, operating covenants, casualty and condemnation provisions, landlord duties for constructing the premises and operating or maintaining common areas, and any obligation of either party to mitigate damages. Each of these provisions will likely come into play in negotiations with tenants related to deferrals of rent and may need to be addressed in any lease modification.
- It is crucial to understand business interruption insurance policies. Most leases require tenants to carry business interruption insurance, and many landlords carry loss of income insurance policies. Whether such policies cover losses based upon diseases or pandemics, civil authority orders will no doubt become a hotly contested area (as well as whether there has been “physical damage” to the premises. But in all events, err on the side of putting your insurance carrier on notice.
Understand the Tenant’s Plan
- Landlords should encourage tenants to have an “open kimono” on their plan to weather the coronavirus storm. Before entering into lease modification negotiations, landlords should consider requesting the tenant’s updated financials and cash flow projections and a summary of available sources of additional capital. This analysis should permit landlords to triage the needs of its various tenants and allocate resources accordingly.
- Landlords should also encourage tenants to explore the various local, state and federal economic relief packages established over the past several weeks with the tenant’s lenders, legal counsel and financial advisors, including but not limited to the CARES Act  and the various disaster loans available through the SBA and others.
Put it on Paper
Once the respective positions of each of landlord, tenant, and landlord’s lender have been determined, the parties should memorialize the agreement regarding lease modification in the form of an amendment or letter agreement, as applicable. In addition to addressing changes to the payment obligations of the tenant, landlords should consider including the following provisions:
- Extension of term; “blend and/or extend:” Any deferral or forbearance of rent will likely require a corresponding mechanism to repay the rent deferral – be it an extension of lease term (or requiring the tenant to exercise a renewal option early) and blend/amortize the deferred rent into the balance of the lease term.
- Further assurances. Require further assurances from both parties to assist the other in seeking rent mitigation resources and further amend the lease if necessary or desirable to obtain rent mitigation.
- No-waiver. Landlords should ensure that the lease and any modification include the boilerplate “no-waiver” language that ensures that any delay or forbearance by either party in exercising its rights under the lease operates as a waiver of any available contractual rights or remedies. Additionally, the landlord should request a release from the tenant as to any claims it may have (or think it has) against the landlord. The arguable courtesy that the landlord is providing the tenant with a rent deferral, in whatever form, should at the very least provide that the tenant cannot bring up any claims of breach or default on the landlord’s part prior to the date of the lease amendment memorializing the rent deferral/forbearance.
- Force majeure. Landlords in the midst of construction of a building or tenant space, or obtaining land use entitlements on behalf of the tenant, should consider addressing any coronavirus-related construction delays and provide tenants with any required notices as provided under the applicable force majeure provision.
Like the adage “how long is a piece of string” there is not a one-size-fits-all solution to the response to a tenant’s rent relief request, or in some cases, fait accompli notice. The landlord-tenant relationship has never been fully altruistic. While both parties need each other, perhaps more than ever, make sure you understand the wants and needs of the tenant in order to maximize the wants and needs of the landlord. Understand the particular nuances of the lease that you as the landlord would like to correct/modify. For example, in the case of a retail tenant, does the tenant have a co-tenancy clause, which can perhaps be modified; are their credit enhancements another guarantor and expansion of the breadth of the guaranty?
The tenant’s “backstop,” of course, is that in New York most state courts are closed to civil actions and eviction enforcement is stayed until June 18, 2020, pursuant to the Governor’s Executive Order 202.8. So even if litigation is the landlord’s desired course of action it may not be a viable course of action at present. In the end, the courts and the community may look more favorably on the civility of the landlord and tenant amicably resolving the disputed issues affecting their commercial relationship during the current pandemic (using your leverage points of course!)
This alert does not purport to be a substitute for advice of counsel on specific matters.
Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.
 See Harris Beach’s prior legal alert on force majeure provisions in response to the coronavirus: https://www.harrisbeach.com/news/commercial-landlords-and-tenants-face-contractual-questions-in-wake-of-covid-19-pandemic
 The CARES Act provides relief in the form of forgivable loans incurred by eligible businesses for payroll and rent payments, among others. See Harris Beach’s summary of key CARES Act provisions: https://www.harrisbeach.com/wp-content/uploads/2020/04/Key-Provisions-from-COVID-19-Stimulus-Bill.pdf
 See Harris Beach’s legal alert regarding emergency financial relief available to small businesses: https://www.harrisbeach.com/news/emergency-loans-available-to-small-businesses-under-cares-act/