Impact of COVID-19 on LeasesDecember 9, 2020
In leasing transactions, the better part of 2020 revolved around amendments to existing leases to provide relief for tenants impacted by COVID shutdown orders and security for landlords that their rent revenues would not remain unpaid, whether temporarily or permanently. As COVID has continued to impact nearly every industry, landlords and prospective tenants are now looking forward at how to contemplate COVID risk in new leases. Although neither party wants to imagine another shutdown, practical landlords and tenants are negotiating creative clauses in new leases to address the possibility of future shutdowns in the following ways, often times depending on when during the term the shutdown occurs:
Commencement Date Manipulation
For new tenants that may require some time to open for business or that are currently under mandate not to open, some are addressing the possibility of a closure before a tenant has even opened for business in the premises. In these instances, tenants are defining the “Commencement Date” of the term of the lease (often the main catalyst in the payment of rent) to be tied to their ability to open. In such instances, landlords should be keen to include in the same definition that such date may also be triggered by a change in any existing mandated closure order that would permit the tenant to operate in the premises, whether such tenant opens or not. The negotiation then becomes how long after such change in the mandated closure order would the Commencement Date begin.
Particularly for the early months of the new lease, some tenants are requiring that if a federal, state, or municipal order mandates their business to close because of the COVID pandemic in their first few months of operation, then their rent will abate during such mandated closure. Landlords are therefore requiring that such abatement is only available if the tenant is not in default under the Lease at such time of closure or anytime thereafter; imposing caps on such rent abatement period; and requiring that the term of the Lease extend for a period commensurate to such closure period, which rent shall be at the rental rate of the last month of the term (presumably higher than the rent during the closure period).
In the event that a new tenant manages to open and operate, only then to become subject to a COVID mandated closure, some landlords are providing tenants immediate relief to defer rent, interest-free, while the tenant is prohibited from operating in the premises. The negotiation then centers primarily on: how much of the rent will the tenant be permitted to defer; for how long will the landlord permit deferral; when will repayment begin; and at what rate must repayment occur. Much like in rent abatement scenarios, the landlord typically requires that the tenant must not be in default at the time of the closure or at any point thereafter.
With the “new normal” here for the time being, many new lease transactions are proactively addressing potential COVID challenges. That being said, the scenarios mentioned above are not one-size-fits-all, and any COVID negotiations should be particularly tailored to the business of the tenant, the COVID-related mandates in place in the particular jurisdiction, and the pressures of each party impacting their flexibility. Parties to new leasing transactions in 2021 will want to be prepared with industry insights and best practices when they negotiate these novel provisions.
We are here to help answer specific questions and offer advice on your options. Feel free to contact any member of our Real Estate Group.