Attorney: How to deal with landlord-friendly leases

So many property owners and their tenants are struggling to stay in business, let alone cash-flow positive, through the COVID-19 crisis. It’s been almost two months since the World Health Organization declared it a pandemic, and stay-at-home orders in many states are not anticipated to be fully lifted in the foreseeable future. Tenants and landlords must work together, and with their lenders, to change lease and loan terms to enable tenants to survive and landlords to ensure long term viability. 

With many urban and suburban communities now beyond the "triage" stage of the pandemic, those managing the property impacts of COVID-19 should be focused on the future. Certain tenants with limited cash flow problems are going to remain open. Others have figured out how to pivot their businesses to conduct limited or modified operations. Some have already thrown in the towel.

Leases are typically landlord-friendly and rarely contain force majeure protections that enable a tenant to offset its financial obligations. Some tenants are attempting to use the narrow and fact-dependent common law doctrine of “frustration of purpose” to terminate their leases, requiring either that COVID-19 was such an unforeseen event that it rendered the lease impossible to perform or that laws passed as a result of COVID-19 have made performance of a lease illegal. Practically, however, tenants and landlords would  be more timely and effectively served by working together to modify lease and loan obligations to enable the parties to “tread water” until COVID-19’s grip on commerce loosens and everyone can retool their businesses for future success.

On the financing side, if they haven’t done so already, business owners and landlords should discuss with their lenders a loan payment deferral or abatement modification, with the deferred or abated payments being shifted out at least one year if not beyond the original maturity of the loan. Businesses should also apply for governmental assistance in the form of special SBA or Federal Reserve lending and grant programs and take advantage of reduced interest rates. Because of the high volume of need, we have seen some banks streamline the application process by initiating "queue and call-back" appointments for customers applying for these loan and grant programs. On the lease side, tenants and landlords should consider base rent deferral and abatement, ideally shifting rent obligations to be entirely percentage of sales based. They should also be addressing reduced customer sale opportunities or increased sales from consumer stockpiling,  expanding lease permitted uses, and changing opening-hours requirements.  

Looking ahead, expect that government-mandated and health official recommended product and service delivery changes will impact retail, restaurant, office and industrial space design, delivery of goods and services, and technology needs. Landlords should be identifying with their tenants, particularly those providing essential services or online direct-sale products, how to make available more or different space configurations to change operations for customer physical separation and product and service pivoting. Some examples include:

• Outfitting all public-accommodating facilities entrances and shopping baskets, staff entrances, and procurement and warehousing facilities with adequate sanitizing stations.

• Providing restaurants with additional or reconfigured kitchen, service and dining room space to safely distance staff and customers from each other and to demarcate delivery/pick-up and dine-in operations areas. 

• Changing grocery stores’ block aisle spacing, traffic control, and “racetrack” peripheral aisle uses as necessary to promote safe distancing, as well as installing more varied POS technologies, logistics and location options.

• Provide pharmacies and medical practices with expanded space close to or within existing locations to offer patients limited services (i.e., vaccinations) in a more isolated environment. 

• Identify new staging, storage and convenient pick-up locations to serve expanded delivery models for retailers relying on online sales, including by thoughtful design and reallocation of common area space to permit these uses by tenants. 

As soon as these space and fit-out needs are predictable with any certainty, the parties should brainstorm how to most efficiently make these modifications to support commercial growth, and put pen to paper to clearly document the revised or new terms. 

Marni Lefkowitz Ahram is an attorney with Shapiro, Lifschitz & Schram’s Real Estate and Business groups. She can be reached at [email protected].