In the relatively brief time since the COVID-19 pandemic has hit our nation and economy, the virus has caused an unprecedented and seismic shift across all facets of the commercial real estate industry. Commercial landlords and tenants have been forced to quickly pivot their position and strategically rethink the language and enforceability of their lease agreement(s). Although the Coronavirus pandemic is still evolving and the market has not yet fully responded, many landlords and tenants believe it essential to take proactive measures for the benefit and viability of their businesses.
The language, definitions, and clauses now being closely debated/discussed amongst parties to commercial transactions include:
Rent Abatement / Abandonment:
Rent abatement is considered a “workaround” that offers an opportunity to keep the agreement between the landlord and tenant intact in the event the property becomes inoperable.
Circumstances calling for abatement of a tenant’s rent should be included in commercial lease agreements. Rent abatement language will determine whether a landlord will reduce a tenant’s rental costs or eliminate these costs temporarily until the property can operational once again. We have seen COVID-19 render many retail, office, and industrial spaces inoperable, unlike any other recent world event. As a result of the Coronavirus, existing abatement clauses are now being triggered and debated among the parties.
In a commercial setting, a landlord’s business liability insurance will sometimes cover situations of necessary rent abatement. It, therefore, may become incumbent upon the tenant to initiate available rent abatement through the landlord as a coverable loss passed through to the insurance carrier.
It is important to understand rent abatement efforts between landlord and tenant have never before been negotiated on such a wide scale. Thus, the previously negotiated terms in the lease agreement may or may not be completely enforceable. This “gray area” leaves uncertainty that has led many landlords and tenants to consider obtaining counsel to review and negotiate their rights under the agreement.
One alternative to rent abatement is rent abandonment. Rent abandonment occurs when a landlord entirely waives its right to collect certain rent payments. Unlike rent abatement, which infers that rent may be delayed or partially waived, rent abandonment is a more complete release of a tenant’s rent obligation. Although not necessarily contracted for, in the original lease agreement, many tenants have requested (and received) rent abandonment from their landlords under the auspice of maintaining an agreement in place and the tenant operable.
Also sometimes referred to, or known as, “Acts of God” – Force Majeure language is commonly found in commercial leases. It protects the parties from being required to perform their respective duties/obligations to provide the lease space as defined under the lease agreement during times of extreme uncertainty or extenuating circumstances. Such circumstances often cited under Force Majeure clauses include war, terrorism, earthquakes, hurricanes, tornadoes, explosions, or plagues. The application of the current COVID-19 epidemic has incited many to invoke force majeure application to their lease agreements, thereby adjusting duties to perform fully or timely. Similar to a tenant seeking rent abandonment or abatement, the application of a force majeure clause may initiate a negotiation between the parties to alter the course of the parties’ duties and obligations pursuant to the lease agreement.
Almost all commercial leases include some language regarding a tenant’s permitted use(s) of the leased space. Very rarely before COVID-19, however, was such a wide array of permitted uses affected at one time. Many retail, office, medical and industrial properties are currently experiencing a complete stand-still or are facing extreme logistical complications. A tenant who can no longer operate their space, post-virus, for their contracted use is a tenant who cannot be expected to remain in business. If a tenant must adapt its previous or current use to one outside the scope of the original lease agreement, the tenant and landlord should strongly consider memorializing the agreed changes in writing.
Common Areas are most often made available in multi-tenant buildings. Buildings with multiple users converging into a common areas begs the question of how tenants may still operate while complying with new governmental requirements, including social distancing. Some tenants have elected to limit or prohibit the use of common areas, while Landlords in some instances have elected to prohibit a tenant’s access to said common areas. Because lease agreements often factor common area fees, such as Common Area Maintenance (“CAM”), how then should landlords be charging tenants which no longer has access to their common areas? The answer depends on each unique lease agreement and the landlord/tenant relationship. The health and viability of both landlord and tenant during the current pandemic and moving forward will help shape the negotiation on how/what the parties are willing to compromise during these times of uncertainty.
If you are a commercial landlord or tenant and find yourself needing legal oversight to either renegotiate your existing lease agreement or needing representation to formulate a new lease agreement, please contact Stephen Pryor or the other attorneys at the law firm Katz, Pryor & DiCuccio, LLP.
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