As the COVID-19 pandemic continues, many experts are predicting a severe impact on the commercial real estate market, including offices, retail, and hotels. Since March and April, when the national emergency and non-essential business closures were declared, many business tenants have been unable to pay their rent, which has caused difficulties for landlords.
Here’s some advice for landlords and tenants who may be feeling the pinch of late commercial rent payments.
- Business tenants who have not yet taken advantage of assistance programs such as SBA loans or PPPs are encouraged to look into emergency assistance and insurance programs offered by local governments in their states and apply as soon as possible if they are eligible. We encourage landlords to encourage delinquent tenants to take advantage of these programs to pay their rent.
- If you have a “business interruption insurance clause”, check your policy to see if you are covered in the event of a pandemic, and if so, contact your insurer immediately.
- While many states have adopted post-COVID-19 temporary executive orders protecting tenants, such as suspending rent for a period of time and prohibiting eviction actions, most of these only apply to residential leases, leaving commercial lease tenants out of these protections. This means that commercial property owners can still initiate legal action against delinquent tenants by filing a demand for payment of rent or a foreclosure/eviction complaint in court. On the other hand, delinquent business tenants may also be able to argue that the cause of their rent arrears was a force majeure inability to perform due to the state’s business closures, especially since leases often contain such a clause (force majeure clause), which could lead to different legal outcomes depending on the interpretation of whether the recent COVID-19 outbreak constitutes a force majeure event.
- Unless you have a “self-help eviction clause” in your lease, you can’t force a tenant out on your own without a court order. Even if you own the property, you shouldn’t enter to evict without the tenant’s consent. This is considered illegal and can result in penalties and even a civil lawsuit by the tenant.
- Landlords considering granting a rent concession at the request of a tenant should consider a combination of the following before making a decision.
- Total amount of rent owed
- Whether the tenant has applied for any government assistance programs or related insurance.
- Whether COVID-19 was the primary cause of the tenant’s inability to pay rent.
- The tenant’s credit score and past rent payment history.
- The tenant’s business performance and ability to pay future rent.
- When the lease expires
- Whether the tenant will agree to add or delete certain provisions to the existing lease that the landlord desires when granting the rent waiver (e.g., extended lease term, extended options, right of first refusal, etc.).
- The possibility of adding a personal guarantee from the tenant.
- The impact on other tenants in the building
- Any additional burdens on the landlord in the event of a rent waiver (e.g., lower profitability, higher vacancy rates, higher borrowing costs, etc.)
- In addition, you may want to consider the following options that you and your tenant can discuss and put into a written agreement.
- Apply security deposits to past-due rent
- Paid by the tenant, even if it is a common area maintenance fee (CAM) or tax.
- Reduce rent for a specific period of time and then pay the unpaid difference over a period of time in the future.
- Converting a traditional fixed rent to a floating percentage rent based on the tenant’s operating performance.
- Suspension of late fees
- There are many other negotiable lease terms.
These are difficult times for everyone. We hope that landlords and business tenants can work together to get through this difficult time wisely. If you need legal advice, including negotiations or legal disputes related to commercial real estate leases, we strongly encourage you to seek the advice of an attorney specializing in commercial law or real estate. If you have any further questions about the content of the column, or if there is a piece of law you would like our readers to know about, please don’t hesitate to contact me at mail@songlawfirm.com. I will incorporate it into my next column.