Commercial Landlord-Tenant Relations During the COVID-19 Pandemic
Amid the health and economic crisis created by COVID-19, landlords, property managers, and tenants of commercial property are scrambling for information and establishing new policy. Briefings by the President and Governor change the way businesses can be conducted with little or no advanced warning. What makes sense one day, may not be an option the next.
What has become clear, is that the COVID-19 pandemic is causing economic upheaval for businesses. Among the hardest hit are restaurants, gyms, churches, and hair salons, but many others are experiencing a complete shutdown or a sizeable loss of business. While the federal government is attempting to provide some economic relief to businesses, many companies will not be able to take advantage of these limited programs. Some will be left unable to meet their financial obligations, including their lease payments.
Commercial landlords need a comprehensive, yet individualized, plan for dealing with tenants whose businesses have been closed or otherwise severely economically impacted. When making that plan, they should attempt to be flexible and consider the many ways to work through these difficult days. What works in one situation may not for another. As in most cases, landlords should first analyze the strength of the tenant and the lease terms. This will provide important direction for creating a plan for moving past the COVID-19 emergency. Because each situation will be unique, a nondisclosure agreement will keep the details confidential and prevent help offered to one tenant from undermining other negotiations.
Tenants faced with drastically reduced revenue will likely ask for either rent abatement or rent deferment. Generally, the best approach is to temporarily defer all or part of the rent, waive late fees, assure the tenants that they are in no immediate danger of eviction, encourage the application for all available assistance, and establish a congenial rapport. While covering the rent is important, many business owners are facing a multitude of problems, such as completing contracts, retaining employees, and basic survival. Temporary rent relief will be greatly appreciated and will not waive the landlord’s right to collect rent in full.
Based on the tenant’s financial stability and history of rent payments, this may be a good time to amend the lease. A good faith negotiation can result in everyone walking away happy. Depending on the business and the lease, the landlord may request financials for the preceding year plus year-to-date in order to adequately assess both the need for relief and the ability to structure a realistic recovery plan. Some possibilities are:
- Abate rent for an agreed upon period (two or three months) in exchange for an extended termination date
- Defer rent for an agreed upon period with the deferred amount amortized over the remainder of the lease (or perhaps amortized over a pre-determined, shorter term that makes sense for the specific tenant)
- Defer rent for an agreed upon period with a balloon payment at a later date
- Apply all or part of a security deposit to current rent
- Modify lease terms such as CAM (common area maintenance) fees or maintenance
- Expand or reduce the leased premises
- Increase rent escalations in exchange for short-term rent reduction, deferment, or abatement
- Add an individual as an additional tenant to strengthen the lease
- Add a personal guarantee
Under the concept “making lemonade out of lemons,” this might be a good time to make improvements to leased premises. It’s difficult to renovate when business is in full swing, but while operations are suspended or severely reduced, tenants and landlords can partner to paint, deep clean, replace flooring, do landscaping, and generally spruce up the property. With tenants providing sweat equity and landlords covering the cost of materials, the landlord-tenant relationship is strengthened and the tenants’ commitment to the leased space is reinforced. Ideally for the landlord, the cost of materials will be applied to rent. I f that’s not an option for the tenant, the landlord could provide the materials or reimburse as agreed.
Small, commercial tenants without a CFO or executive board may appreciate direction to appropriate government programs. There are many excellent industry-specific websites, but the primary basic relief is through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020.
The CARES Act contains $376 billion in relief for American workers and small businesses. The Small Business Administration (SBA) website has information on loan and debt relief options for both landlords and tenants. The same programs that benefit tenants may also benefit landlords who are often small businesses themselves.
The Paycheck Protection Program provides loan forgiveness for retaining employees by temporarily expanding the traditional SBA 7(a) loan program is part of the CARES Act. If employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities, the loan will be forgiven. Application is made through any SBA 7(a) lender or any participating federally insured depository institution or credit union. Essentially, small businesses make the application through their bank.
Also, under the CARES Act, The Economic Injury Disaster Loan Emergency Advance (EIDL) provides up to $10,000 of economic relief to businesses that are currently experiencing temporary loss of revenue due to COVID-19. Application is made through the SBA website. If approved, the loan advance will not have to be repaid.
Further, the CARES Act gives states the option of extending unemployment compensation to workers who are ordinarily ineligible for benefits, such as independent contractors. Unemployment benefits are administered through each state’s unemployment insurance program. This program might help small business owners with no employees such as hair stylists, massage therapists, and general contractors.
In addition to government programs, tenants should be encouraged to look into possible coverage under their insurance policies. Insurance policies are merely contracts which provide payment to the insured in certain situations where loss has been incurred. “Interruption of business” clauses may or may not cover this pandemic depending on both the wording of the policy and future court decisions interpreting the language.
Adversity is opportunity. If handled well, both landlords and tenants can come through these difficult days stronger. Amending or extending a lease can help tenants get through the COVID-19 crisis in the short-run leaving landlords with valuable tenants, and more valuable property, in the long-run. As in any business negotiation, the goal is to find a resolution that works for both parties. Both landlord and tenant have problems that need resolving, but they also each have things to offer. A good result is more likely if a non-adversarial relationship is maintained, parties are innovative, and focus is kept on the proverbial big picture.
Provided below are links to some helpful resources:
http://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
http://www.dol.gov/coronavirus/unemployment-insurance
Kathryn Byler is Pender & Coward attorney focusing her practice on real estate, business, guardianships, and estate planning matters.
Filed Under: COVID-19 Articles and Resources