Note: This article is general in nature and does not constitute legal advice. We are not attorneys. Please consult your attorney before taking any action.
It's no secret that a commercial tenant does not get many of the same protections that residential renters do. In these uncertain times due to COVID-19, commercial tenants need to start thinking about how they will handle rent payments and other lease obligations if their business has slowed down or stopped completely.
With the COVID-19 outbreak, many areas of the country have been shut down. Because of these concerns, many commercial tenants must consider whether they will able to cover rent payments in the coming months. Forced closure of retail stores violates various operations covenants for commercial tenants, and they may already be in default based on their contract terms without even realizing it.
How should these challenging issues be addressed?
Tom Barrack, Chicago real estate investor and CEO of Colony Capital, Inc., has stated that the commercial mortgage market is on the brink of collapse due to COVID-19 shutdowns. He notes that the most significant expense that many retail businesses have is their rent, stating: “When commerce stops and they can't pay rent and they can't pay interest on debt, and then the banks and the intermediaries can't pay their investors, it all collapses.” He states that the effect could “dwarf that of the Great Depression.”
Most commercial leases do not have a clause that deals with the unique circumstances affecting the United States with the COVID-19 outbreak. Instead, some commercial renters may have already violated their lease without even realizing it. You can use the below tips and information to help curb the effects of any potential lease obligation violation.
Commercial leases are often pretty comprehensive. However, many leases likely will not specifically address the unique pandemic situation affecting the country right now. Nonetheless, there probably are provisions that come into effect if you cannot continue to do business.
Review your lease language carefully. You may be able to take advantage of a provision that you had never even considered before.
Some landlords may individually determine that they will forgo your lease obligations for a short time if they understand the predicament that you or your company is in. Many landlords are having some of the same issues as you, so they may be more understanding under the circumstances.
They may also find it challenging to keep up with utility or maintenance obligations right now, so there may be an opportunity to trade services or waive certain obligations on both sides of the contract.
If you cannot reach your landlord by phone, be sure to put something in writing about your situation and mail it to their last known address. Having something on record that you attempted to communicate with the landlord can go a long way.
Most landlords want to see your business succeed and keep you as a long-term tenant. In some cases, they may be willing to forgo rent payments for a short time without declaring that you are in default because they are interested in keeping you as a tenant. Perhaps you can arrange for a brief “pause” in rental payments or a temporary reduction.
In California, for example, two large apartment landlords have just offered rent deferral plans. Something like that type of arrangement might work well for your situation.
Keep in mind that you are not limited to the remedies available in your commercial lease if you both agree on a compromise. In most situations, however, you should be sure that whatever agreement you reach is in writing.
COVID-19 is hitting the U.S. economy hard on a lot of levels. As a commercial leaseholder, you need to start planning now so that the effects are not as drastic in the months to come. Review your lease obligations, stay in communication with your landlord, and work together to come up with creative solutions. With some creativity and understanding, your business can weather the storm.
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