Negotiating with Tenants During a Major Economic Disruption

Summer 2020 Issue
By: Ron Derven

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.

Questions and Answers

Attorney George Pincus answered several questions concerning tenant issues during a recent NAIOP webinar.

Q: Regarding tenants that were delinquent on their rent prior to the COVID-19 pandemic, do landlords have a right to evict during this time?

A: You have the legal right to evict. That being said, how will you sue them if the courts are on hiatus? Work with legal counsel to properly document everything that is going on. It’s important that you do not take or fail to take any actions that will waive your rights, especially if the courts are on hiatus.

Q: What legal position will landlords have in tenant bankruptcies for unpaid rents?

A: You’re going to have the same position you have under the bankruptcy code [as it exists now]. Looking into the future, however, it is unknown how bankruptcy laws will be affected by the COVID-19 pandemic.

Q: If a landlord is proposing deferring rent but not extending the terms, should a lease amendment still be completed?

A: Yes.

Q: Would you recommend that a landlord create a policy to cover rent deferment or should each tenant be handled on a case-by-case basis?

A: You have to do this on a case-by-case basis.

Q: Is there any liability to keeping buildings open regardless of government closure?

A: Yes, there is. Do not do it. Close it down; comply with the law.

Q: My ownership is deferring rent and encouraging tenants to help themselves with loans and insurance coverage. When this is all over and the tenant says they cannot pay, how do we protect ourselves?

A: These are all things that you should be covering in detail in your defer-and-extend amendment. If you are going to work with the tenant as they apply for an SBA loan or some other government aid, there has to be an agreement that when the money comes in that they will share that with you to pay part of the rent. This is a good time to get a personal guarantee from the tenant.

Q: If the tenant does not pay rent on the first of the month, does the landlord need to put the tenant in default to protect his rights in the future?

A: Yes. Everything you do needs to be documented, and everything you do must have a no-waiver provision in it.

Q: Are you advising your clients about any standard deferral or extension terms for leases?

A: Yes. I say let’s give them three months. That is not an industry standard; it is something I have advised on a number of occasions recently.