There are two sides to every coin

Legal considerations for commercial landlords and tenants.

By Daniel Saxon

Both landlords and tenants appreciate that the COVID pandemic has caused or accelerated fundamental changes in the way we do business. They just see the challenge from a different perspective. Market trends indicate a continued decline in the ability to support local brick and mortar retail with the shift to online ordering and continued work from home and telecommuting. These two key factors suggest a sagging market for both retail and office space in 2021.

Tenants should prepare for a successful lease renegotiation

Tenants first need to understand that their landlord typically has significant costs associated with the leased premises and expects to receive some return on investment after expenses. While it not the landlord’s responsibility to support the tenant’s business operation, generally neither the landlord nor the landlord’s lender want to see the tenant evicted from the premises. If a tenant finds himself in a lease that he cannot financially support, it typically creates a benefit to all parties to restructure the lease under acceptable terms to the extent that is possible. 

Tenants can increase their odds for success in a lease restructure if they are prepared when they approach their landlord. I suggest creating a set of talking points:

  • (i) demonstrating the effect (and extended effects) of the pandemic on their business (declines in revenue, workforce shortages, and increased expenses) 
  • (ii) a specific request for restructure—if that is a rent reduction, an amount of rent that can be supported by the current business operation of the tenant
  • (iii) a brief pro forma demonstrating the successful operation of the business under the proposed restructure. 

If the tenant is already in default under the lease, they should understand that the eviction moratorium was not a rent holiday. Tenants are still responsible to the landlord for any missed rent payments, together with late fees and interest as permitted under the terms of the lease agreement. Accordingly, tenants should include a plan as to how the arrearage can be repaid — whether in whole or at a reduced amount, in one sum or over time, or perhaps a forbearance agreement with conditional forgiveness at the end of the lease term. 

Landlords should work with tenants to find repayment solutions 

Other than larger shopping centers, it is my experience that most landlords are local folks who are also impacted by COVID. Even when the landlord is a large company, the company has lenders and shareholders or investors who expect payment. While under stress during this difficult time, a tenant may think of their landlord as a faceless entity, which isn’t helpful in a negotiation. 

Landlords can avoid this misconception by personalizing their contact with their tenant(s). Landlords can let the tenant know that, while they understand the tenant’s financial difficulties, breaching the lease agreement places the burden of operating the tenant’s business directly on the shoulders of the landlord. 

When faced with defaulting tenants, threatening a lawsuit and eviction is often less likely to result in a positive outcome for the landlord. Working through the lease and rent issues might mean accepting (i) payment of arrearages over additional time; (ii) some form of a payment holiday; or (iii) resolution through a reduction of rental income. This is more likely to result in a paying tenant, rather than a vacant space and a costly, but ultimately uncollectable judgment against a tenant. 

If a breach is inevitable, the landlord should consider an arrangement with the tenant involving a peaceful surrender of the premises in good condition and some type of payment plan for what is owed under the lease. A civil action for eviction and damages should be the last resort. 

“Change the locks” is a common misconception

Often, landlords believe that if the tenant is late with a rent payment, it is possible to simply “change the locks” and take possession. Tenants often fear they could show up to their business to find a bolted door. This is not necessarily the case. Commercial lease agreements typically require the landlord to give the tenant written notice of the default and allow some reasonable cure period before proceeding with petition for eviction. Lease agreements generally provide the right to terminate the lease after the cure period. Because the early termination of a lease may cause the landlord unintended future consequences with respect to his future remedies, the landlord should discuss any such early termination in advance with their attorney on a case-by-case basis. This should be done prior to sending a written notice of termination or a written notice of default, which purports to give the right of termination. 

Likely, the best protection for the landlord is to maintain contact with tenants who become delinquent and to follow the notice requirements under their specific lease agreements. Eviction actions can be time-consuming and the clock often starts with the notice of default and right to cure.

Landlords and tenants should consider and review lease rewrites

I advise both landlords and tenants to review Force Majeure provisions. These excuse performance under an agreement based on specified events beyond the control of the preforming party. The typical language includes weather events, civil commotion, war, and other acts of God. Pandemics may not be directly specified, but may fall under the act of God portion. Force Majeure is not implied—it must be specified in the contract. All parties should review these provisions and make revisions as appropriate. 

Given the significant impact COVID has had on both landlords and tenants, it’s important that both parties understand both sides as they reconsider their lease. I strongly recommend they review their lease agreements with their lawyers now because 2021 will be different than years past.

Daniel Saxon is a real estate attorney, partner and shareholder at Novit & Scarminach.


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