COVID-19 Profiteering - What NYC Commercial Real Estate Tenants Need to Know

A client of mine experiencing financial hardship due to COVID-19 sent me the below quote from the Wall Street Journal a few weeks back,

“The uni-ver-sal ad-vice we are giv-ing ten-ants is don’t pay your rent and see what hap-pens,” said Derek Wol-man, part-ner at law firm David-off Hutcher & Cit-ron LLP, which of-ten rep-re-sents bars, restau-rants and ho-tels in lease ne-go-ti-ations.

Wolman goes on to mention that this is especially true in New York state, where there is pending legislation that would give 90 days of rent forgiveness to residential and commercial tenants who suffered financially as a result of COVID-19.

This quote encouraged me to commence writing my first ever LinkedIn article in an attempt to demystify tenants’ rights and obligations in a post-COVID-19 environment. There are many real estate advisors, attorneys and insurance brokers who have been offering objectionable council putting their own self-interests ahead of their clients. In the foregoing article, I would like to dispel some of these widely spread myths and answer important questions that tenants should be considering to successfully plan their future here in New York City.

Will NYC Rent Forgiveness Legislation for Commercial Tenants Come to Fruition?

As of Monday, March 23, suspending rent payments for 90 days has officially been on the table with over 20 co-sponsors in favor of senate legislation to impose a period of rent moratorium. Mayor de Blasio mentioned at a news conference, “If ever there was a time there should be a rent freeze, it is now. That’s something I think we have to do given the sheer severity of this crisis.” Despite Mayor de Blasio’s support of this proposal, Governor Cuomo has made it clear that he thinks the state’s 90-day suspension on evictions has resolved complications for renters. Ultimately, the proposal needs the support of Governor Cuomo and one should be prepared for this legislation to not be enacted.

Is It Wise to Trigger Default if Not Absolutely Necessary?

A default clause in a lease provides the procedures for a landlord to obtain an eviction or the threat of an eviction for a commercial tenant’s violation of a lease. A well-drafted default clause will incentivize the tenant to uphold their lease obligations with the knowledge that an eviction and damages will result. 

Advising a client to go into default is not good practice and below are a few reasons why:

·        Once a tenant’s default is triggered, Landlord’s can draw down on security deposits (both cash and letter of credit) to make up the difference.

·        Triggering default, oftentimes, has significant knock-on-effects on other tenant rights within the lease.

·        In many default clauses, there are provisions included requiring payment for unpaid rent and other damages as well as violations of non-monetary requirements.

·        Tenants lose goodwill with the landlord making future negotiations more difficult

Do Tenants Have Any Legal Standing to Forgo Rent?

·        Lease Provisions that May Offer Refuge

o  There is potential, legal standing to forgo rent under Force Majeure, Quiet Enjoyment, Casualty and Interruption of Essential Services lease provisions.

·        Common Law Principles

o  Impossibility of Performance, Impracticability of Performance and Frustration of Purpose could potentially excuse a party’s contract performance as well.

Please consult with your attorney/s first before deciding to take legal action as your rights will be determined by what is specifically defined in the lease or what can be successfully litigated in the NYC court system.

Will My Business Interruption / Civil Authority Insurance Protect Me?

Typically, there needs to be a policy trigger from direct physical damage to the insured’s property. Contamination due to a virus does not necessarily equal physical damage, but some tenants may be able to make this claim with the proper legal counsel. I am advising my clients to submit claims to their insurance providers immediately, even if their current insurance policy does not cover pandemics/epidemics. The reason is, if legislation does get passed to include pandemics/epidemics as covered perils, the sooner the claim is made, the sooner coverage would come into effect.

What should I Expect From My Landlord When/If I Make a Rent Abatement Request?

Any tenant that is suffering financially due to COVID-19 should expect to be 100% transparent with their landlords. Landlords want to know that their tenants are reaching out to them as a last resort and not just utilizing the current crisis as an opportunity to gain leverage. Below are potential landlord requests:

·        Recent and up to date financial information. If a tenant is unwilling to share their financial information, this could call into question the true motive behind the initial outreach. A commercial business would never approach a bank requesting a loan without providing necessary financial information.

·        Extension on a current lease term in exchange for upfront free rent. This extended lease term provides an opportunity for the landlord to amortize the cost of the free rent over the life of the lease.

·        Rent deferment programs that allow payback of April, May and June rents over an agreed-upon period as additional rent. Beyond agreed upon time parameters, expect the payment to incur interest fees as Landlords will take into consideration the time value of money.

·        The execution of a non-disclosure agreement (NDA). As this uncertain environment escalates, so too does the likelihood of a commercial rent strike. NDAs ensure that landlords will be able to negotiate with each tenant on a case by case basis taking into account all relevant factors given that no two tenant-landlord relationships are the same.

What Are the Significant Knock-On Effects to Tenants Not Paying Rent?

·        Landlords cannot pay bills (taxes, water and sewage charges, oil or gas for heat, electricity, building management and security fees, repairs and overall upkeep and maintenance).

·        Office buildings reduce their provided services as they cannot be afforded

o  Skilled tradesmen (electricians, HVAC technicians, plumbers, construction workers, etc.) take significant losses due to the decrease in demand for their services.

·        Mortgage servicers and other financial institutions fail as they stop receiving payments on loans

·        City and State budgets fail due to delinquent real estate property taxes

What is the Solution?

This crisis has created a challenging economic environment in which tenants struggle to pay rent. It seems that the only clear solution would be for the city and state to agree on offering rent subsidies rather than rent abatements given the significant impact of tenants not paying rent outright. This way, the people that need the assistance the most will receive it and the negative consequences associated with rent abatement would be mitigated.

Message for Tenants and Landlords

There is no doubt that COVID-19 has changed the way we work and view the workplace. This health crisis is like none other that we have experienced in the past. Times are difficult for many companies both large and small, but I would like to encourage productive and mutually beneficial dialogue between both Tenants and Landlords. We are in this together, and we must work together to chart our course towards a successful future.

I look forward to hearing your thoughts.

Dominic V. Perkovic [email protected]_212-735-8553