Recent government enforced closures, social distancing and a general change in commerce as a result of the effects of COVID-19 are having astronomical impacts on retail tenants throughout the United States. Retail tenants and their landlords are struggling with how to respond to the sudden loss of sales. Do Tenants have a right to abatement of their rent if they can’t keep their stores open? If not, what else can be done?
The following are a few tips to avoid defaults and evictions, minimize loss of rental income, and aid in a successful settlement.
TIP I: Cooperate and Communicate, Communicate, Communicate!
The most successful businesses will be those that are able to cooperate to minimize losses. Certainly, litigation is an option but it’s not the preferred one. If you are a landlord, reach out to your tenants to inquire how to best assist them through this time. If you are a tenant and unable to make your rent payments, notify your landlord before rent is due to discuss possible payment options.
TIP II: Don’t Panic.
If you are a landlord and received a force majeure letter, don’t assume that force majeure applies in your situation. Numerous national tenants have begun sending out the same force majeure letter to their landlords. But force majeure, as a contractual right, varies by the terms of the contract. Look at your lease to determine if force majeure is applicable to your lease. Other tenant arguments, such as impossibility and frustration of performance may or may not apply under your circumstances, but even if they do, under many circumstances, the tenant may not have the right
If you are a tenant, know that landlords want to avoid vacancies, additional brokerage fees, and unnecessary costs of re-tenanting a space. If you have been regularly making your rent payments and you will continue to be a viable business after the crisis is resolved, chances are very good that your landlord will want to work with you.
TIP III: Consider All Relevant Parties and Approvals For Any Settlement.
Lenders may require approval over lease modifications that allow rent reductions. Landlords, consider how a rent reduction could affect your debt service ratio. Guarantors should also sign off on any lease amendments. A rent abatement or deferment could have a detrimental affect on a guarantor by increasing the amount of rent due later in the term. Franchisees, be sure that your franchisor has approved and agrees with the terms, if necessary. Partners or other investors on both sides may also require approval.
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