While much of the nation’s focus has been centered on when businesses will come back and life will return to normal, landlords are also experiencing a cash crunch and uncertain futures since tenants may not be allowed to operate in their leased spaces. As the American economy continues to struggle considering the Covid-19 outbreak, commercial landlords need to take certain steps to protect their investments.
1. Speak to the Lender
With tenants possibly requesting or demanding rent forgiveness, a landlord needs to understand what is owed to its lender. Just as a tenant may want to renegotiate terms of a lease, a landlord should not timidly stand to the sidelines without seeking some relief from its lender. A decrease in cash flow may harm a landlord’s ability to pay the mortgage, which may cause foreclosure concerns. Landlords may seek mortgage forgiveness, a new payment plan, or seek to refinance with the assistance of another lender. A lender may make arrangements for a good borrower. It is imperative that landlords know their current financial condition and mortgage terms before engaging a tenant on pending rental payments. For example, a lender may require a landlord receive the lender’s permission before modifying lease terms with a tenant.
2. Try to Work with the Tenant
It is in the landlords and tenants’ best interest to maintain an open dialogue to resolve any rental payment issues. Tenants will certainly experience less income as many states imposed Stay at Home Orders. However, Landlords also owe duties to lenders, and must make certain required monetary payments as well to avoid being in default.
Landlords may enter agreements with tenants to modify terms of a lease. If the landlord is willing to do so, and even if a modification/amendment provision in a lease does not require it to be in writing, it is critical that any modifications to the lease be in writing, and signed by the appropriate parties to avoid any later confusion. All notice provisions must be strictly adhered to ensure all persons or parties are made aware of what is being offered. Modifications to the lease may pertain to the forgiveness or decrease in the amount of rent for a period time, which would then get paid back later on, reduction in CAMS, rent being tied to the tenant’s sales, or drawing from the security deposit with tenant being required to replenish it by a certain period of time.
If and when any lease modifications are performed and satisfied, the landlord should enter another written contract with the tenant wherein the modified terms are extinguished, and the original provisions of the lease are revised. A landlord should always strive to avoid any ambiguities in its relationship with a tenant.
3. Anticipate the Impending Force Majeure Argument
Whether a tenant understands what Force Majeure is, the tenant has probably heard enough about how an Act of God, impossibility, or event outside a tenant’s control may permit a tenant to avoid paying rent. Not all Force Majeure clauses in commercial leases are the same. It is important for the landlord to understand the language in the existing lease to see if the current coronavirus pandemic constitutes Force Majeure under the lease. For example, are delays in delivery of critical supplies or delays in leasehold improvements because workers could not gather to complete a job sufficient to win a Force Majeure argument? The lease may also provide the landlord or tenant with a period of remediation if a Force Majeure incident were to occur. In today’s environment where businesses and tenants have been so drastically affected, a landlord must be aware that prior legal defenses may be met with unease by judges who may lend a sympathetic ear to a tenant’s difficulties.
Unless ordered to do so by governmental action, landlords should refrain from directly prohibiting tenants from operating from their leased premises. The tenant will likely have a much stronger case for nonpayment if the landlord prohibits, or interferes with, its tenant from operating.
4. Does the Landlord’s Insurance Policy Offer Any Assistance?
Landlords should review their insurance policies to determine if any interruption of its business may allow for the recovery of monetary assistance. Because of the onslaught of affected tenants and landlords from the coronavirus pandemic, insurance companies will attempt to deny such a claim because of the flood gates of claims it would open themselves up to. However, landlords should not be afraid to tender a claim and force their insurer to provide a written response.
5. Hold Off on Eviction Proceedings, For Now
If a tenant is in default, and monies are owed, it is a natural reaction by a landlord to begin eviction proceedings in an effort to cause the tenant to pay the amount due or cause the premises to become empty so it can be rented to a different tenant. Due to the coronavirus pandemic, California Governor Gavin Newsom issued Executive Order N-28-20, which provides a framework for local governments to follow in enacting moratoriums on commercial tenant evictions. The Executive Order lifts any California laws that may restrict a county or city from enacting such moratoriums. As a result, many counties and cities have announced eviction moratoriums. For example, Los Angeles Mayor Eric Garcetti, on March 17, 2020, issued a public order providing for a moratorium on evicting commercial tenants. It is important to note the moratoriums often pertain to non-payment of rent if the tenant can demonstrate the inability to pay based on Covid-19. Eviction proceedings are still possible if the tenant is found to be selling illegal drugs from the premises or performing other illegal and egregious activities.
Not all responsibility falls on the landlord to assume why a tenant cannot pay the rent. The tenant is responsible for notifying the landlord, in writing, of the lost income he/she/it is experiencing and the reason to pay the full amount of rent. There is nothing that prevents a landlord from requesting written documentation supporting a tenant’s claim it cannot pay rent. Further, no county or city has provided for forgiveness of rent. In fact, under the City of Santa Monica’s moratorium, the rental repayment period is 6 months, and in Los Angeles, it is 3 months. As tempting as it may be for a landlord, there is no charge or ability to collect late fees for rent that was delayed because of the moratorium imposed.
The economic effects of the COVID-19 virus are likely to weigh heavily on the commercial leasing industry for the foreseeable future. Landlords need to stay informed and maintain open lines of communication with their tenants and lenders to survive this pandemic and succeed in the future.