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COVID-19: Commercial Leasing – Landlord and Tenant Rights

As we navigate through choppy and sometimes uncharted waters during the coronavirus pandemic, commercial tenants and landlords are experiencing their own challenges. Many businesses are subject to governmental shutdown orders or restrictions on their ability to operate in the manner that was their normal before the pandemic. Some commercial tenants and landlords may be experiencing financial difficulties which impact their ability to pay rent or mortgage payments, respectively. Below are some issues that tenants and landlords should be considering in the current economic climate. It must be noted that although specific options might vary across states/jurisdictions, these common themes should be considered.

Considerations for Commercial Tenants

Are you prohibited from accessing your leased space (i) by a governmental order, (ii) because even though there has been no such governmental order, the landlord prohibited/limited access or (iii) because you have voluntarily chosen (without governmental order or landlord prohibition/limitation) to not access it because you’ve adopted a “work from home” approach?

  1. If due to governmental order, review your lease documentation and your insurance policies to see what rights and/or obligations you might have under them with respect to the circumstances caused by such an order.
  2. If due to landlord (but not governmental) action, review your lease documentation and your insurance policies to see what rights and/or obligations you might have under them with respect to the circumstances caused by such action.
  3. If solely due to your voluntary choice, bear in mind that your lease might (but might not) contain a covenant by which you agreed to remain open. Do not fail to consider your need to comply with that covenant or, on the other hand, open up a discussion with your landlord about having that covenant waived.
  4. With respect to reviewing your lease documentation, consider any applicable force majeure provisions, interruption of service provisions, and provisions expressly granting the landlord the right to close the building under certain circumstances.

Even if the lease does not appear to provide you the ability to seek rent abatement under the circumstances for which you are not occupying your leased space, consider approaching the landlord with a request for rent abatement (and, if applicable, relief from any covenants in the lease that require you to occupy the space).

Considerations for Commercial Landlords

Are your tenants prohibited from accessing your building (i) by a governmental order, (ii) because even though there has been no such governmental order, the tenants have moved their employees to a “work from home” environment or (iii) because you have voluntarily chosen (without governmental order) to limit access to your building for health and safety reasons?

  1. If due to governmental order, review your loan documents and your insurance policies to see what rights and/or obligations you might have under them with respect to the circumstances caused by such an order.
  2. If due to tenant (but not governmental) action, review your loan documentation and your insurance policies to see what rights and/or obligations you might have under them with respect to the circumstances caused by such action.
  3. If solely due to your voluntary choice, bear in mind that your loan might (but might not) contain a covenant by which you agreed to remain open.
  4. Under any of the circumstances, you have may have financial covenants such as a debt service coverage ratio which may be difficult to achieve if tenants are not paying their rent. Additionally, there may be limitations on your ability to grant the relief requested by your tenants without the lender’s prior approval.

Do not fail to consider your need to comply with any of the covenants in your loan documents; or, on the other hand, start a conversation with your lender about having those covenants waived or for payment reductions or moratorium under these circumstances. Even if your loan does not appear to provide you the ability to seek a payment abatement or moratorium in the situation where your tenants are not occupying their leased spaces, consider approaching the lender with appropriate requests to avoid a default.

Summary

During the current economic and health-crisis climate, landlords and lender may be more agreeable than otherwise to grant some or all of the requested relief by tenants and landlords, respectively. Tenant requests might aid a landlord in seeking relief from its lender. Landlords and their lenders might be more sympathetic than usual to such requests. Certain jurisdictions are instituting eviction and foreclosure moratoriums; however, in many instances, this means only that the eviction or foreclosure cannot be carried out, but it does not mean that the proceedings to start these processes cannot be commenced. In almost all situations, early engagement of your landlord or lender is likely to achieve the best results.

Should you have questions or need assistance in reviewing leases or loan documents, Spencer Fane attorneys are available to assist.