Landlord-Tenant Relationships for Commercial Real Estate During COVID-19
Written by Soo Yeon Lee, Esq.
When the State of Illinois issued a stay-at-home order in March 2020 and the COVID-19 crisis continued to affect our world, one particular category of our society became even more complicated: commercial landlord and tenant relationships. There is no doubt that both landlords and tenants find themselves in uncharted territory. Non-essential businesses were shut down and essential businesses saw a huge drop in sales and business volume, so landlords began receiving requests for various forms of rent relief. For the last several months, I have been asked to advise on how to deal with the COVID-19 crisis in the context of landlord-tenant relationships. If this is something you or a friend are experiencing, please keep reading.
If you are in a situation in which you might benefit from negotiating with your landlord, the first place to start is to review the lease agreement, as it is the blueprint of this relationship. The lease agreement dictates what one party can do in the event that the other party does not perform as promised. However, the problem is that the rights and obligations contained in the four corners of the document do not translate well directly to reality. What is the realistic and pragmatic approach to take and what questions do you need to ask?
First, you must understand the available options and evaluate them. The crisis most likely stems from inability to pay rent. Rent relief can range from 1) deferral; 2) partial reduction (partial abatement); 3) full reduction (abatement). When tenants make requests for these forms of rent relief, they may find themselves surprised when landlords, while seemingly sympathetic to the tenant’s circumstances, cannot simply forgive rent obligations during the most difficult time in the pandemic. It is because in addressing these requests from tenants, landlords consider how these requests would impact their ability to maintain the property or pay their mortgage payments. Therefore, in negotiating rent relief, it is critical to take the approach of working together and being mindful of the fact that landlords and tenants are in a long term relationship that is generally beneficial to both parties. The key is to find the right balance in the scale of rent relief that could help a tenant survive the crisis and provide the necessary flexibility while assuring the landlord of a more stable income stream. Many creative solutions—both temporary and more permanent—are available as long as both parties are willing to work it out. Where to strike the balance depends on the tenant viability considering the nature and industry of the business, impact on the cash flow, landlord’s ability to relet the space, each party’s perspective on tenant default, and the amount of funds needed to keep both parties afloat.
In addition to rent relief, there are other non-monetary aspects of lease obligations such as operating hours or repair or maintenance obligations. Be mindful of these non-monetary obligations as you negotiate various forbearance or attempt to restructure your lease.
The last consideration is the potential consequence of tenant default in the absence of any type of rent relief. Many considerations go into this calculation, and this analysis has to be done case by case because no space is the same. In short, you will have to know your bottom-line and ask the hard question of “would you rather.”
If you are a landlord, ask these questions:
If your current tenant moves out, can you easily re-lease the space to another tenant?
Is the current rent rate competitive?
What is the condition of the space? Do you have to remodel or improve in order to relet?
What about brokerage commissions and other expenses?
Will there be legal costs involving tenant default?
What will be the timeline of all this?
Considering the tenant’s business and industry, what is their viability?
Would you rather deal with tenant default than negotiate?
If you determine that you are willing to negotiate rather than deal with tenant default, be realistic in your expectations of tenant performance and know the numbers you need to operate the property. Be sure to maintain a framework that will cut your losses and have a second best option that you can deploy depending on where you strike the balance of rent deferral, abatement, or other forbearances.
If you are a tenant, ask these questions:
If a landlord refuses to negotiate and evicts you, is losing the space an option you can consider (because you can find another space somewhere else at another time) or do you need the space no matter what (to keep all the investments you have made into the business)?
Depending on the answer to the question above, the negotiation approach should differ with different contingencies.
Considering the nature of your business, what are the true impacts of the COVID-19 and what predictions do you have?
Are you willing to open up your books to show your hardships?
Do you need long term or short term relief?
If you determine that you need to ensure your right to the space, be prepared to present numbers that would work to help you survive the crisis. If the landlord is not willing to discuss long-term arrangements, then negotiate short-term relief. No matter what arrangement you end up with, be sure to keep the ability to control your business and to exit from the space the way you want at the right timing, should such circumstances arise.
The information contained here has been prepared for informational purposes only and is not legal advice. This material describes issues in general terms, and good legal advice required detailed analysis of particular facts and circumstances. You can contact a Mauck & Baker attorney at (312) 726-1243.