Commercial Leases During The COVID-19 Pandemic – What Can Landlords Do To Protect Their Rights?

Dealing with commercial leases during the COVID-19 pandemic can be tricky, as the virus has the potential to affect the economy of the United States at a level that could ultimately surpass the financial crisis of 2009. Reports from commercial landlords all over the country suggest that around 75% of restaurant and retail tenants failed to make payments of rent due on April 1. In these uncertain times, commercial landlords should prepare for their tenants’ financial struggles. Careful planning will be vital when it comes to mitigating losses and maximizing available remedies inside and outside of the potential bankruptcy of a tenant.

Landlords Must Protect Their Rights from the Outset

When dealing with commercial leases during the COVID-19 pandemic, prevention is key. Prior experience with tenant defaults has taught the most experienced commercial landlords to push for the protection they will need in the future at the outset of a deal to protect themselves and their businesses in the event tenants encounter financial challenges during their lease term. However, even if a commercial landlord did not do this at the outset, there may be an opportunity to renegotiate due to this unprecedented global pandemic.

To protect themselves in these uncertain times, landlords should try to negotiate better commercial lease terms, modify or eliminate problematic provisions, cure any deficiencies, and improve their overall protections in their existing lease documents. However, since landlords have limited options to protect themselves once their tenants commence bankruptcy, they should consider the following when renegotiating the terms of existing commercial leases:

• Review Your Documents

When heading into a workout or forbearance renegotiation, commercial landlords should make sure to review their existing lease documents, paying careful attention to:

• Definitions of “event of default” and “tenant default;”
• Notice and cure provisions;
• Provisions that excuse performance; and
• Clauses addressing duties to mitigate damages.
• Avoid Tricky Notice Requirements

If a default or breach does not become an “event of default” until the landlord sends notice, the landlord could accidentally forego default interest or lose the ability to take action on account of what would have been a pre-bankruptcy event of default based on its failure to send notice. To the extent possible, therefore, lease documents should define default to be self-executing, deemed to have occurred after a failure to honor an obligation when due.

• Include Force Majeure Clauses

Commercial landlords should insist on using force majeure clauses. Whenever possible, landlords should limit these clauses to very specific categories and avoid catchall provisions that excuse a tenant’s performance under a commercial lease when unforeseeable events that are similar to those included in the force majeure clause occur. Additionally, commercial landlords should strive to make it explicit in their leases that a force majeure event will not excuse the tenant’s obligation to pay rent, and that the tenant’s financial inability to perform will not constitute force majeure.

Dealing with Commercial Leases During the COVID-19 Pandemic – Work with Experts

When it comes to dealing with commercial leases during the COVID-19 pandemic, working with commercial real estate experts is vital. In these uncertain times, making legal mistakes can have severe financial consequences. Landlords should take this opportunity to become masters of their lease agreements and explore opportunities to proactively improve them with the help of a skilled and experienced commercial real estate lawyer.

The long-term impact of the COVID-19 pandemic remains unknown, but we can expect the social and economic disruption to be significant. As some unemployed consumers look for new jobs and others adjust their budgets, businesses of all sizes will struggle. As a result, it will be difficult for many commercial tenants to meet their obligations under their leases, and they may find it necessary to seek bankruptcy protection. Right now, more than ever, it is vital for commercial landlords to understand their rights and obligations in order to be prepared for whatever comes.

Jurado & Farshchian, P.L.’s team of bankruptcy, real estate, and litigation professionals are here to provide further advice and help our clients navigate the legal system. If you have any questions, please feel free to contact us. Call Jurado & Farshchian, P.L. today at (305) 921-0440 or send us an email to [email protected].