Negotiating with Tenants During a Major Economic Disruption

Flexibility is a must, but document everything as specifically as possible.

All the legal precedent in the world won’t solve the problem of tenants who cannot pay their rent, such as restaurants or businesses forced to lay off all their employees because they have no revenue in the aftermath of coronavirus-related shutdowns.

“It is impossible for lawyers to predict how courts are going to rule on these issues in the future as defaults from COVID-19 situations begin to work through the judicial process,” said attorney George Pincus of Stearns Weaver Miller, P.A., in Fort Lauderdale, Florida, during a recent NAIOP webinar.

Pincus said many large national retail tenants are informing landlords that they are not going to pay rent for the foreseeable future and claiming impossibility of performance and force majeure (unforeseeable circumstances that prevent someone from fulfilling a contract). Pincus said if a landlord receives such a letter, they must assert their rights immediately.

What Can Landlords Do?

Pincus suggested that landlords take three actions. First, respond to and dispute the tenant’s claim for not having to pay rent. Second, state the legal basis for the dispute (impossibility of performance and force majeure do not excuse payment of rent). Third, state with specificity that the landlord is not waiving any rights and remedies under the lease or the law.

It could turn into a war of attrition, Pincus said, with some tenants defaulting on rent and vacating the premises.

“Perhaps the goal of building owners should be to work out the best deal they can with tenants, not waive any rights and hope for the best when the world stabilizes again,” he said.

This requires the landlord to defer and extend lease amendments. Pincus said landlords must state with specificity the amount that will be deferred in rent payments. He advised that unless the landlord is forgiving rent, the word “abatement” should never be used under any circumstances, because it has a different legal meaning than deferment of rent.

Be specific as to what can be done regarding base rent as well as additional rent (taxes, insurance and common-area maintenance or CAM). If only base rent is deferred and the tenant is going to keep paying taxes, insurance and CAM charges, then state that specifically. The arrangement should never be open-ended: state the period of time, such as three months. If need be, extend it further down the road. Put it all down on paper and send a letter. Never do it by e-mail or fax.

Tenant improvement (TI) could become an issue going forward, according to Pincus.

“Look carefully at the conditions that require funding TI allowances,” he said. “You do not want to throw good money away on completing a build-out for a tenant that may not take occupancy. Have a forthright and open conversation with your tenant about delaying the process and then, if you can reach an agreement, document it with specificity.”

Pincus said any defer-and-extend terms with a tenant should trigger a phone call to the lender.

“Most loan documents have covenants regarding modifying leases, which under certain circumstances may require lender approval,” he said. “Typically, these covenants provide that ‘material’ modifications to a lease require lender approval. Deferring rent and changing the term of the lease are more likely than not going to be construed as ‘material.’”

Ron Derven is a contributing editor for Development magazine.