Without doubt, by now, nearly every human being on the planet has been impacted by the Covid-19 pandemic to some degree. If you have a commercial lease, as either a landlord or tenant, how to proceed both now and after the pandemic is a real and present concern. Even as states begin to reopen businesses, the immediate and near-term outlook for many businesses is uncertain. Commercial leases are often among the largest and most important regular expenditures for any business. If a business is facing the possibility of missing or delaying a commercial lease payment, the first step is to realize that both parties – tenant and landlord – are likely facing the realities and difficulties of this crisis. The landlord likely has expenses, taxes, insurance, and a loan obligation to meet; the tenant has operational costs, key employment decisions to make, and key suppliers also seeking payment.
The second step is to review the lease itself to determine the obligations of each party and the possible outcomes of missed or delayed lease payments. In fact, even businesses maintaining operations and sufficient revenue should consider reviewing lease provisions in the event the need arises. Further, we always recommend seeking professional review of the lease – as even experienced commercial parties have likely never experienced an event such as the one we are all facing.
In many cases, the third step is to begin open and honest communication with the landlord or tenant, as the case may be. Though not always, in many cases, simply stating that a lease payment could be delayed as a necessity for remaining open can lessen tension between landlord and tenant. As a landlord, it may be equally important to initiate communication with your tenants to assure them that you understand the difficulties they face.
If a lease payment is missed or delayed, generally, there are three potential outcomes: (1) the landlord begins ejectment proceedings; (2) the landlord notes the default of the tenant and maintains the ability to assert relevant rights; or (3) a lease restructuring or “workout” occurs. In some cases, the landlord may use more than one of the above outcomes. This fourth step is where all parties should critically and strategically consider how to proceed.
While ejectment might be a landlord’s preferred remedy, many courts are not currently hearing such matters. Further, the landlord should consider whether acquiring a new tenant is a realistic endeavor in the current business environment. Keeping the current tenant in place and building in payment flexibility to weather this crisis might be the outcome most likely to assure lease payments continue in the near future. Likewise, the tenant must be careful to provide the landlord with sufficient assurance that payment flexibility will benefit the landlord in a meaningful way.
In summary, examining how to proceed with a commercial lease is a crucial exercise for many businesses. We at BridgehouseLaw are here to assist with lease review and/or landlord-tenant negotiations.