By; Mac Ross, Esq., The Law Office of Kyle Felty, P.A.
As the nation moves toward what it hopes is the downslope of the Covid-19 global pandemic curve, its effect on commercial real estate and landlords and tenants has not yet reached its peak. Orders to shelter in place have sent employees home, and non-essential businesses have been asked to close their doors, turning what were once vibrant commercial properties into desolate outlets.
The problem is simple to pinpoint: Tenants cannot conduct their business; therefore, they cannot pay rent, which in turn hurts the Landlords who rely on that rent money to pay for the costs to keep the property (ie. maintenance, taxes and in some cases, mortgages).
But what is the solution?
If you are a Tenant, struggling to make rent payments due to the Covid-19 pandemic, here are a few things you can do:
- Determine what your total rent consists of. If you have a standard triple net lease, meaning your rent consists of a base rent amount, plus a portion of common area maintenance costs and property taxes; reach out to your Landlord to discuss the possibility of a rent reduction or rent deferral. A landlord may be willing to give you a break on base rent if the operating costs for the property will be covered.
- Look for standard language in your lease such as force majeure or frustration of purpose clauses. These clauses address what each parties’ rights are when an act outside of their control interrupts the lease, or the purpose of the lease becomes impossible. Some common relief provided by these clauses can be rent abatement or even termination of the lease.
- Look into your business insurance policy. Business interruption coverage is usually required by landlords of commercial properties and can usually provide money for a certain period while your business is shut down.
- Explore specialized loan programs. Lenders may be able to offer specialized loans in accordance with governmental programs.
If you are a Landlord, struggling to collect rent payments due to the Covid-19 pandemic, some things you may consider are:
- Reach out to your tenants. Be proactive and see which tenants are currently struggling, which tenants are not, and which tenants are on the brink.
- Rent deferral. A rent deferral can be a great way to recoup some of the lost rent over time; when a tenant gets its business back up and running, increase the amount of rent until the missing amount is repaid.
- Rent reduction or abatement. Reducing base rent, or operating expenses, or a combination, can help tenants meet their obligations, while helping landlords meet theirs. Abatement of rent may be an option if tenants are significantly past due, and the ability o find a new tenant is strained due to the pandemic.
- Use tenant’s prepaids. Upon commencement many leases have prepaid rent and a security deposit, crediting these towards current costs can help bridge the gap while tenants are out of business.
- Sublet. If you can find a temporary tenant and the lease allows for it, subletting can be a way to earn back some lost revenue.
To recap, landlords and tenants that find themselves in a tough situation due to Covid should be proactive and suggest solutions that can be mutually beneficial in the long run. In any event it would be wise for either party to consult a local Real Estate Attorney. An attorney with knowledge of your market and experience in commercial leasing, can review your lease, explain your options and work with you and other parties to reach a solution which works for everyone involved.