Commercial Leases & COVID-19

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Iowa Orders

In March, Governor Reynolds issued proclamations intended to provide relief for residential evictions and leases:

While the Governor has not specifically addressed commercial lease evictions, she has suspended portions of Iowa Code Chapter 648 with no statement expressly limiting such suspension to the residential setting.

The Iowa Supreme Court has instructed courts to schedule all in-person hearings for a date after June 15, which includes commercial eviction hearings. If filed now, they would be set for a date after June 15 or a telephonic hearing may be scheduled. Whether a telephonic hearing will be an option varies by county and judge.

Given the Governor’s proclamations and the Supreme Court’s orders delaying most hearings, it is likely that enforcement of commercial leases through the court system will be delayed, but that doesn’t mean you don’t have options.

Practical Approach Advised

Given the present uncertainty, both in terms of the Governor’s proclamations and market demands, landlords and tenants in commercial settings may benefit from taking a practical approach to resolving present or potential default situations. The parties should review existing lease provisions such as:

  • automatic renewal (including deadlines to provide notice of non-renewal)
  • holdover tenancy (including automatic rent increases)
  • force majeure or similar provisions that may modify the rights and duties of either party
  • use of security deposits
  • notice and cure periods

Example: a tenant who otherwise had intended to allow an automatic renewal provision to trigger a new three-year term may wish to provide notice of non-renewal due to uncertainty of surviving the economic downturn and negotiate a shorter renewal term. 

Consider Lease Amendments

Existing lease terms may adequately govern the unique situation the parties find themselves in or create incentives to negotiate changes to accommodate the new lease environment. Importantly, as the commercial landlord-tenant relationship is largely governed by contract, great flexibility exists in crafting a lease amendment to balance landlord and tenant needs with the goal of avoiding a default that is damaging to both parties. Broadly speaking, rent deferment or forgiveness concessions may be balanced against bolstered enforcement rights and/or increased financial reporting/monitoring/security obligations. 

Example: an amendment could agree to defer regular base rent payments for two months provided the tenant demonstrates efforts to obtain an SBA loan, limits the use of any such loan proceeds, provides evidence of the permitted use, and agrees to release its security deposit to apply to the initial deferred rent payment and to restore the same after the grace period.

While there is little restriction on the types of solutions the parties may pursue, it is critically important that the agreement is memorialized by a written lease amendment.

Lenders

Lenders may have a role in any workout or enforcement program, for both landlords and tenants. If either party secured or is seeking a federal Payment Protection Plan loan, sharing information and resources in the loan application and disbursement processes could prove mutually beneficial. Existing loans, particularly on the landlord’s side, are likely to include covenants requiring consent to material modifications to the lease or advanced/deferred collection of rents. Federally backed loans may also impose additional restrictions. 

In all instances, the parties must review applicable loan documents prior to any modification of the relationship to ensure an agreement is reached between landlord and tenant and does not trigger enforcement action by a lender that will wipe out the intended benefits.

The Big Picture

Landlords and tenants are both facing financial constraints. Everyone may benefit from a little grace and collaboration while continuing to protect their own interests as we move forward. Each lease and each situation are different. Landlords and tenants seeking a remedy under their leases or assistance in negotiating and drafting lease amendments are encouraged to contact their attorneys.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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