Though businesses are beginning to reopen, many companies haven’t seen their revenues return to pre-pandemic levels and are struggling to pay rent.
Commercial landlords rely on payments from tenants to cover debt service and other expenses. Both parties will be in a better position if they can reach an agreement that is acceptable to the landlord’s lender.
Tips for tenants
Many distressed businesses are interested in the concept of force majeure — extreme circumstances that may release one party from failing to uphold its contract obligations if prevented from doing so for specified reasons beyond its control.
Tenants need to check the exact language in their lease. If the lease contains a force majeure clause (many do not), it’s possible, but unlikely, force majeure could excuse a tenant’s rent payment. In general, force majeure clauses exclude financial inability to pay.
They simply weren’t drafted with pandemics in mind. Without force majeure, negotiation is a tenant’s best tool.
First, tenants should demonstrate to the landlord exactly how the pandemic has reduced their income and that they are not merely taking advantage of a bad situation.
Next, prepare a business plan showing how the company will survive this crisis. If a tenant comes to the landlord and says, “I can’t pay the rent and I don’t know how I’ll survive,” that will not incentivize the landlord to compromise, nor gain lender consent.
Avoid stating, “I will not pay the rent until the state reopens,” or something similar, because that could constitute an anticipatory repudiation or an anticipatory breach of the lease. Landlords are unlikely to work with tenants making ultimatums.
Instead, offer a potential solution. Landlords are generally not willing to forgive rent, but the strategy we are seeing most often is rent deferral either in whole or in part for three or four months, and then repayment later this year or early next year over a period of time that is feasible.
Other options include converting some or all fixed rent to percentage rent (based on the tenant’s revenue) or converting deferred rent to a loan from the landlord if there is adequate security or collateral.
Of course, tenants advocating percentage rent in lieu of fixed rent must convince landlords and their lenders this makes sense for them.
Lessons for landlords
Before commencing negotiations, the tenant should sign a pre-negotiation letter specifying, among other things, that negotiations do not waive lease obligations, are not, in and of themselves, binding and are not admissible in litigation.
Negotiations and resolutions must remain confidential and thus specific to the tenant at hand, not all other tenants in the building or shopping center. Also, rent relief should not benefit a future assignee or sublessee with a different revenue model.
Landlords should be mindful that courts have limited operations for the foreseeable future, prioritizing other matters such as criminal cases.
Landlords will be delayed in taking back a property, making working things out with tenants more attractive. If eviction becomes unavoidable, commercial landlords may want to start the process now.
Residential evictions are barred until July 1, 2020, and there may be a deluge of filings after that date. Landlords can prepare for the possibility of eviction even while continuing negotiations. Start by identifying steps that would need to be taken if negotiations fail.
For instance, does the tenant have to be notified in writing? Does the lease specify a cure period, or a certain amount of time allowed to the tenant to resolve missed payments? Be aware of these details and document actions now to avoid waiting periods later.
Finally, consider including expedited-dispute-resolution procedures in the rent forbearance agreement, such as providing for a mandatory, expedited arbitration or mediation by a single mediator. If both parties realize that disputes will be resolved very quickly, they’re more likely to live up to the bargain.
Geoffrey F. Fay and Jonathan A. Kaplan are attorneys at Pullman & Comley.
