Several of our landlord clients have been approached by tenants (retail and office) seeking rent relief in various forms due to the COVID-19 crisis. The requests have come from a broad range of tenants — from small business owners to large corporations.
Some tenants have requested a deferral of rent payments because the current business disruption has negatively affected their cash receipts, while others have been a bit more brazen and have asked for a complete rent abatement for three or four months.
Here are a few points for the landlord to consider:
- Pursuant to most leases, the current situation would not provide any justification for the tenant to defer or abate rent. While a force majeure provision may protect a tenant from being in default as a result of “going dark” or failing to perform some other obligations under the lease, generally it would not absolve a tenant from paying the rent in a timely manner.
- Landlords may suggest that tenants first look to see if they can get assistance through the federal CARES Act. There are also new programs through the SBA to help small businesses cover expenses, inclusive of rent.
- In addressing a tenant’s request, the terms of the lease as well as the terms of the landlord’s loan documents must be considered. In most instances, the loan documents have provisions that prohibit the landlord, or at least affect its ability, to unilaterally modify the terms of the lease without the approval of the lender. This provision would restrict the landlord from immediate agreement to deferrals or abatements of rent payments. In this case, it would be appropriate for a landlord to inform its tenants that it cannot agree to any modifications without the approval of its lender.
- To the extent a landlord would like to provide some relief to a tenant (and provided doing so does not violate its loan documents), the following approaches may be considered:
- A portion of the rent can be deferred and then repaid over a relatively few months.
- To the extent that a tenant is legitimately in dire need of relief and the landlord wants to retain the tenant, the lease could be amended to provide some benefit to the landlord to compensate for the accommodation. Accommodations may take one or more of the following forms:
- The deferred rent payments are spread over the balance of the lease.
- The term of the lease is extended.
- The tenant agrees to exercise an extension option in the lease. This may raise the tricky question of determining “fair market rent” at a time in which the landlord may not want to make such determination.
- The security deposit can be applied to the rent, with an agreement that the security deposit will later be restored.
- A modification of an existing guaranty or requiring a guaranty.
- In the case of a retail lease, introduction or modification of a percentage rent clause whereby a portion of the rent is determined by the revenue generated by the business.
- A landlord can advise the tenant that it is incurring additional costs to ensure the safety of tenants such as increased maintenance, disinfecting public areas, providing hand sanitizer, etc.
- Landlords also need to consider the cost to replace a tenant who previously paid its rent and complied with the terms of its lease.
In this unprecedented moment, landlords need to think both logically and creatively in order to resolve the challenges that tenants are facing regarding the financial obligation of rent. Most landlords will want to create workable solutions with quality tenants suddenly facing extraordinary business interruptions and resulting cash shortfalls. At the same time, a landlord has its own expedient financial obligations — and of primary importance are obligations to its lender. This is not the time for good intentions to result in a violation of commercial mortgage agreements. Further, facilities costs for landlords may rise sharply at this time to maintain a hygienic environment, expenses likely not previously envisioned.
If you are a landlord desiring to create financial accommodations for tenants throughout the COVID-19 crisis, BMK can help. We will be happy to review your loan documents and advise on programs available to tenants to reduce their immediate financial burdens and enable them to keep current with rent payments. We can also explore potential modifications to commercial mortgages that may enable landlords to maintain healthy tenant relations until the crisis is past. You can reach the BMK real estate team via our main office phone, (973) 376-0909, using the extensions below or accessing the mobile telephone numbers and email addresses provided:
Office Extension: 1120
Mobile: (973) 568-7559
Office Extension: 1121
Mobile: (917) 514-8043
Office Extension: 1119
Mobile: (917) 716-9302,
This article is for informational purposes only and is not intended to constitute, and does not constitute, legal advice.