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Commercial Lease Considerations and COVID-19

Authors: Jason Klein and Travis Shaw

Municipalities, counties, and states across America have ordered residents to stay home, as the global pandemic of COVID-19 increases in severity. Many landlords are unable to evict tenants due to local orders prohibiting same. The economic effects of COVID-19 have impacted commercial landlords and tenants in a profound manner requiring creative solutions to limit financial loss. Below are a few considerations useful when amending or redrafting commercial leases.

Four Corners of the Lease

As with any contractual dispute, begin by reading the language in the commercial lease. Commercial lease language can vary dramatically, and one clause may limit the ability to rely upon another depending on the specific circumstances. Ultimately, a review by an experienced real estate attorney is required to advise anyone as to the language which controls the commercial lease.

Notice Provisions

An often-overlooked provision of a commercial lease is confirmation that the landlord and tenants are properly providing Notice as required in the commercial lease. Nearly every commercial lease will specify a form for providing Notice of invocation of any remedy referenced in the commercial lease. Further, with potential mail system delays, utilize and ensure delivery to electronic mail addresses for the landlord and tenant, as well with fax numbers when available.

Eviction Delays

Several executive and judicial orders have been passed which prohibit evictions for tenants. The full extent and scope of these orders are not entirely clear and the terms of same must be considered by jurisdiction. However, the effect in some of these orders is that landlords cannot charge late fees, interest, or evict tenants until the end of the prescribed period. The one real certainty is that this is a rapidly developing area of legal consideration. With the possibility of extended reduced economic activity, eviction may not be the preferred manner in resolving the dispute with a potential long-term economic slowdown. Other solutions may provide a “win-win” scenario, as discussed below.

Condemnation

Tenants and landlords may look to other clauses in their commercial leases for support in potential remedies to current financial constraints. Some leases may provide for an abatement of rent payments due to temporary or total condemnation by the government. The downside to alleging a claim for partial or total condemnation is, depending on the commercial lease language, a tenant’s claim for condemnation permits the landlord to declare the commercial lease terminated. Additional related resources include force majeure or abatement clauses. Moreover, Tenants may look beyond the four corners of the commercial lease to assert defenses of impossibility and frustration of purpose. Tenants may also make claims against the government for inverse condemnation arising from the government orders to close all non-essential businesses and failure to provide just compensation as required by the Fifth Amendment of the Constitution. Claims related to inverse condemnation may be temporarily restrained by judicial process, but a final determination of the merits will be delayed due to a temporary slowdown in the court system.

Creative Solutions

Business attorneys are often tasked with finding solutions that will provide a benefit to all parties involved in each dispute. Reaching a creative solution will often vary depending on the germane facts to each party involved. Requiring a Non-Disclosure Agreement and/or Pre-Negotiation Agreement as part of creative problem solving can help the involved parties. Care should be taken when negotiating creative commercial lease solutions with an experienced real estate attorney.

Rent Abatement

One potential option is to delay rental payments for a period of one to three months, with a corresponding commercial lease term extension. Further a recoupment of the rent can be accelerated by amortizing the amount of the rent abated with a corresponding increase in rental payments over the next year. Further, personal guarantees executed by representatives of commercial tenants may be utilized to expand upon current landlord legal remedies in the existing commercial lease. Care should be taken when reviewing commercial lease amendments as well as financial lender requirements prior to finalization of any lease amendment.

Rent Reduction

Another option is to reduce the total rent amount due by fifty percent (50%) for the next few months with an equal payback period. The benefit is to help landlords reduce total revenue reductions over the next few months. Again, care should be taken when reviewing commercial lease amendments as well as financial lender requirements prior to finalization of any lease amendment.

CAM-Only Payments

Another option can include a reduction of rent and a corresponding increase in Common Area Maintenance changes to absorb and redistribute some of the landlord’s costs amongst tenants.

New Lease

Upon the occurrence of a claim for condemnation, force majeure, or other clause providing for a termination of a commercial lease may leave the landlord and tenant in a position to draft a new commercial lease. The above items should be considered when drafting a new commercial lease with the ongoing economic effects of COVID-19.

Please note that nothing in this article is intended to be, or should be construed as, legal advice. Moreover, the information discussed above is not an exhaustive list of items to consider when dealing with a commercial lease. Every commercial lease situation demands a skillful review with an experienced commercial real estate attorney. You may contact the above-referenced attorneys to discuss your matter further and best determine how to proceed with any potential commercial lease problems you may currently be experiencing.

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