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COVID-19 is disrupting the global economy and local economies are feeling the pinch. With many businesses shuttered worldwide and countless unknowns concerning the future, commercial landlords and property managers find themselves in a unique position.
Rent relief considerations
Retail establishments, restaurants, and salons: They’re among the businesses that form the backbone of economies worldwide, occupying storefronts and normally paying rent right on schedule. With COVID-19 forcing closures, many commercial property managers and landlords are on the receiving end of rent relief requests.
Black’s Law Dictionary defines force majeure as “an event that can neither be anticipated nor controlled.” Most commercial real estate leases contain force majeure provisions that might or might not incorporate specific language concerning which types of events are (or are not) covered.
Because a pandemic – and government responses to it – aren’t common occurrences, there are questions of whether COVID-19 is covered under force majeure. Given the generally accepted legal definition and the broad nature of laws concerning force majeure, COVID-19 is likely to be covered. There are likely to be ramifications to consider, including whether and when rent is due.
Renegotiating lease terms and compassionate collection
Businesses deemed essential are booming in many places. Countless others are impacted by government-imposed shutdowns or at the very least, are experiencing serious limitations on their ability to operate as usual. This is happening through no choice of their own and there is minimal potential for finding new commercial tenants during this unusual period.
Whether lease language includes considerations for force majeure or not, commercial landlords may be in a position to take a lenient stance. It may be possible to offer relief.
Buttonwood states, “Many commercial tenants have been unable to pay rent over the last couple of months. As a result of that, we’ve seen landlords applying security deposits to cover tenants’ defaults. Security deposit clauses in leases are nine times out of ten drafted by the landlord or the commercial property agent, but it’s crucial to consider the tenant’s interests too. Landlords should be working with their tenants in times of economic crisis to help them avoid bankruptcy as ultimately that would cause them to default on their lease obligations.”
Compassionate collection is an individual business decision in which a property owner may notify tenants of a temporary suspension of rent or a portion of rent, either to be waived completely or to be repaid in the future. Formally renegotiating lease terms eliminates questions of intent and provides a contractual means for defining future performance.
When renegotiating, seek legal counsel and consider the following at minimum:
- Changes being agreed to, including any changes in operating hours, etc.
- How long the new terms will remain in place
- Under which conditions terms may be extended
- Under which conditions the lease may return to previous terms
If renegotiation doesn’t occur and rent is waived, obligations should be formally reinstated when the COVID-19 crisis eases or ends. Governments worldwide are seeking ways to loosen lockdowns and begin restoring economies.
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In America, Australia, Canada, the United Kingdom, and many other regions worldwide, governments have formally shut down businesses. When citizens are required to stay home for all but essential reasons, even those businesses allowed to remain open can suffer.
Forced closures leave property owners, landlords, and managers wondering how to proceed. In most cases, you have little (if any) legal recourse in the face of government-imposed restrictions and shutdowns.
Americans should check with state and local authorities.
There are no federal guidelines for American landlords and property managers to follow when considering how to proceed. As states have individual mandates in place, property owners should seek information and pay close attention to updates.
UK businesses protected from eviction.
UK landlords and property managers are prohibited from terminating tenancies for non-payment of rent through at least the 30th of June 2020. It is possible that the government will extend measures aimed at protecting commercial renters from eviction. Here you’ll find a summary of the small business grants and support available in the UK.
Australian landlords may not terminate leases.
Australia’s National Cabinet released a Mandatory Code of Conduct for commercial leasing, which prevents landlords from terminating leases or drawing on security deposits when tenants fail to pay rent. In addition, the code requires landlords to reduce rent in proportion to the tenant’s reduction in turnover. When rent is deferred, repayment must be amortized over 24 months or the remainder of the lease term, whichever is greater. Australian property owners should seek detailed information and follow the advice of legal counsel.
Judicial emergencies impact evictions
It may not be possible for commercial landlords or property managers to evict tenants for nonpayment in the current climate. Many jurisdictions have clearly stated that evictions will not take place during the COVID-19 crisis. Additionally, many locations have judicial emergencies in place meaning that normal schedules are not adhered to. Non-emergency hearings may not even take place until the courts resume normal operating hours; even then, expect the judicial system to be operating with a backlog of cases. Simply put, formal eviction proceedings are neither practical nor likely for the time being.
In most cases, rent protections consist of formal deferment for commercial tenants who are struggling to pay rent due to mandatory shutdowns. Worldwide, we’re seeing voluntary agreements between commercial landlords and their tenants. Governments are looking after the interests of businesses and are considering the way COVID-19 impacts landlords as well as tenants.
While economies have been put on pause as people everywhere pull together to slow the spread of COVID-19, business owners and employees are eager to get back to work. For now, it’s important to take a sensible stance. The best results are achieved when both parties are incentivised to work together for a common aim, which in this case is keeping commercial properties running successfully. With this in mind, it’s important to maintain dialogue with renters, consider ways to offer relief and ensure that they don’t have to close shop, and stay updated on national and regional measures.