Commercial Landlords and the Pandemic

Filed under: Real Estate Law

As the pandemic hit, the government ordered businesses to close. Now, as businesses start to reopen, restrictions are in place. Tenants stopped paying rent under their leases due to the impacts of COVID-19. In many cases this caused financial hardship to landlords. While the tenants remain liable for the missed rental payments, it may be in everyone’s best interest to pursue a mutually acceptable agreement to ensure that the tenants can continue their business. It is important that commercial landlords do the following before entering into an agreement with the tenant.

Review of Lease. You should review the lease terms related to the payment of rent, force majeure, late charge, interest on late payments, continuous operations, inducement recapture, security deposits, and notice requirements.

Impact of Potential Vacancy. If rent relief is not provided and the tenant eventually goes out of business, how will the vacancy affect you, including the ability to pay any mortgage on the property? Will it be difficult to lease the property to a new tenant?

Verification of Tenant’s Financial Condition. Ask the tenant how the pandemic is affecting their business, including financial documentation (if available) to support the tenant’s claims. Most leases provide that the landlord can request financial information from the tenant, and tenants should be compliant with such a request.

Landlord Defaults. Finally, make sure that you, the landlord, have complied with all terms of the lease. A landlord default may provide the tenant with a basis for not paying the rent and/or terminating the lease.

Rent Relief Alternatives. Under the law you do not have to provide the tenant with rent credit or abatement. You only have to allow a deferral of the rent until a later time. But carefully consider the financial impact of losing the tenant. This includes having the property vacant and the cost of finding a replacement tenant. You may agree to defer some of the rent while at the same time, offer rent abatement or a short term rent reduction so that you can retain a tenant who up until the pandemic had been a good tenant.

Lease Modifications. If you do reach an agreement with your tenant, make sure that you confirm that agreement with a written lease amendment so that there are no future misunderstandings.
The bottom line is, an occupied property with a known tenant is always better than a vacant property, even if you have to give up a little financially. If you have questions, check with counsel to make sure that you fully understand your rights. Plus, document properly the results of any negotiations with a tenant.

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