Finding Common Ground In Lease Provisions During COVID-19

The Pandemic's Effects

Landlords and tenants are breaking established conventions to try to assure their survival. These efforts focus on the common theme of full or partial abatement of rent payments during periods of mandated closure or to afford relief due to diminished sales performance or a tenant's inability to fully utilize a leased premises. As numerous tenants in retail and office centers seek or require fiscal relief, landlords should be mindful of their loan covenants if the property is financed. Rent deferments, abatements or long term rent restructuring may trigger lender consent requirements or may simply be forbidden under applicable loan documents. Similarly, a careful analysis of loan covenants such as debt service coverage ratios and loan to value requirements should be undertaken to determine whether property that is financed remains in compliance with financing constraints and whether leases will, once modified, qualify if and when refinancing becomes necessary.

Before a landlord and tenant determine that their best interests may be served by reforming lease economics, consideration should be given to whether its better and safer to enter into binding commitments now instead of judging and reacting to facts and circumstances as they occur to allow for their effects to be judged. If the decision is to proceed, the following elements should be considered:

1. Fairly and realistically adjusting and resetting any early termination rights and co-tenancy protections contained in retail leases;
2. Deciding whether full or partial rent abatement is to be given or whether rent should be deferred and recouped over time;
3. Establishing a new base rent and coupling that with additional rent based on a percentage of sales;
4. Using security deposits to cover rent deficiencies and, if so, their replenishment;
5. Conditioning rent relief on application for and payment of funds received from government assistance programs and/or insurance proceeds; and
6. Expanding or contracting the term of the lease.

Clarity and flexibility must be maintained. Landlords should take care to restructure leases to only address the established impacts of the pandemic. Tenants continuing to struggle with the economic slowdown wrought by the pandemic should engage landlords to revisit and recalibrate previously negotiated relief which is now deemed insufficient.