Commercial leases have become a primary concern for many business owners in the wake of the coronavirus pandemic. Now that it is illegal for many businesses to operate in their commercial spaces, it is not surprising this pandemic has driven businesses to the verge of violating their leases by not paying rent.
With the suspension of evictions across the country, landlords and tenants are in a unique position. Tenants cannot pay rent and landlords cannot evict. This leaves the perfect opportunity for attorneys to negotiate with landlords to work towards compromises on lease agreements during the pandemic to achieve some peace of mind for everyone.
As a quick note, every tenant should be advised to apply for the SBA loans. It is going to be easier to negotiate with the landlord when they know the tenant applied for funding from the government. Here are some negotiation tactics I have used for my clients that have actually worked so far.
Allowing the landlord to use security deposits to cover rent
In my experience so far, this solution is the most appealing to landlords. The typical lease agreement allows landlords to use the security deposit to cover unpaid rent, but this usually occurs upon the termination of the lease. Using the security deposit before the termination of lease exposes the landlord to liability even when permitted by the lease.
By giving express permission to use the security deposit now instead of later, the tenant gives the landlord short term security of the rent payments. The permission also gives the landlord assurance that the use of the security deposit will not become a legal issue because the tenant consented. This option will, of course, require some plan for the tenant to repay the security deposit for the remainder of the lease. Therefore, this option is not as effective if the lease will expire soon.
Extending lease term
The coronavirus is changing the way we work. The businesses that survive this outbreak will change the way they operate. Will this decrease the demand for physical office space in the future? No one knows. However, tenants can use this uncertainty to their advantage. If the tenant offers to renew the lease now instead of waiting at the end of the lease, it at least ensures stability for the landlord in the intermediate-term.
In any other circumstance, it is absurd to propose an early renewal for a lease when the tenant cannot currently pay rent. But these are no ordinary circumstances. If there is a positive relationship between the landlord and tenant, renewing for an additional term now can be beneficial for both parties. Unlike the strategy above, extending the lease term early works well with leases that will soon expire as it is probably difficult right now for landlords to find new tenants.
This strategy is the most preferable for tenants. It allows the tenant to suspend the payment of rent and add the missed months to the end of the lease. Forbearance in this context mirrors what many commercial lenders are doing with mortgages. Banks are granting forbearance on commercial mortgages, so there are landlords who are not under pressure to pay their mortgages right now. It is impossible to know if a particular landlord has been granted forbearance by their lender, but those who were granted forbearance are not proactively forbearing rent. It is up to the tenant to ask.
Any forbearance agreement needs to be carefully drafted. I caution my clients on this option because there is no guarantee the forbearance term is going to be enough. We do not know for sure how long quarantine orders will last so the core of any forbearance agreement will be based on speculation. The landlord will want some certainty for the length of the forbearance, so any forbearance agreement should at least build in contingencies in case of quarantine orders last longer than the forbearance period. Finally, every agreement should include a waiver of late fees.
Business lawyers are only limited by our creativity in how we help our clients navigate their commercial leases during this time. I am sure there are many other strategies that will work, but the above strategies have worked with real landlords so far.
We may not be saving lives or providing medical care, but these commercial leases are keeping some of our clients up at night. This is the perfect opportunity to show them we will always do what we can to protect their business.