As the COVID pandemic wreaks havoc in the commercial leasing world, Landlords and Tenants alike have come to realize that they were unprepared for the consequences. Existing lease agreements in most instances were not designed to address government mandated shutdowns, force majeure clauses notwithstanding. So what is to be done, short of expensive litigation?
Many Landlords and Tenants are seeking proactively to reach compromise agreements which can help each to weather the storm. One option is a negotiated termination of the Lease. If the relationship was weak or strained prior to COVID, or if the post-COVID prospects of the Tenant are not promising, one or both parties may be looking for an escape hatch. Generally, these take the form of buy-outs whereby the Tenant offers up a lump sum in an amount substantially less than the rent which would otherwise come due under the Lease over the balance of its scheduled term. In exchange the Landlord gets an orderly vacating of the premises along with cash in hand to cover expenses for an anticipated vacancy period, and theoretically an opportunity to relet the premises sooner than anticipated and garner a windfall.
Another option is a negotiated rent reduction or abatement that involves a forgiveness of some portion of the rental payments which would otherwise be coming due. If a Landlord wishes to salvage the relationship with the Tenant and ensure the continuation of the Lease post-COVID, a temporary reduction or abatement in the rental payments may be sufficient to carry the Tenant through the crisis. Such an arrangement can at least ensure the Landlord is collecting sufficient funds to cover operating expenses while perhaps foregoing profits until such time as its Tenant is able to resume full operations. The parties may seek to condition such an arrangement upon documented evidence that one or both parties are actively pursuing whatever government stimulus options, if any, may be available.
Finally, another alternative is a negotiated rent deferral. In this scenario, rather than the abated or reduced rent being forgiven, the parties agree that it will be deferred, such that the full amounts provided for in the original Lease remain due but the timing of payments is modified so as to permit all or a portion of the rent to be deferred and paid over time at a later date during the term of the Lease. Such a deferral could be treated as a loan, subject to interest, or simply as a restructured rent payment schedule.
Whatever option is chosen, it is essential that the terms be carefully negotiated and stated in an appropriate Lease Termination or Lease Amendment agreement. Ensuring that all details are addressed, including with respect to the condition of the premises, the timing of payments, the treatment of security deposits and operating expense obligations, as well as mutual releases, will dictate whether the agreement serves the purpose for which it is intended. Legal assistance is imperative and whether you are a Tenant or a Landlord, you should be consulting with counsel.