Demystifying the Commercial Lease–Can You Get Out of Your Lease Due to the Coronavirus Pandemic?

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Mozart’s opera The Marriage of Figaro is a sequel to Rossini’s opera, The Barber of Seville. Rossini’s opera ends when Rosina breaks loose from her guardian, Dr. Bartolo, to marry Almaviva.

Mozart’s opera begins three years later with Figaro, personal valet to Count Almaviva, betrothed to Susanna, maid to Rosina, who is now Countess Almaviva. Figaro and Susanna are preparing for their wedding.

However, unbeknownst to Susanna, Figaro has a problem to solve before he can marry. He borrowed money from Marcellina, housekeeper to Dr. Bartolo. And Figaro promised to marry the aging Marcellina if he couldn’t pay back the loan. Figaro is desperate to find a way out of his contract so he can marry Susanna.

Bartolo and Marcellina reveal Figaro’s promise and insist that Figaro marry Marcelina, instead of Susanna. To delay the marriage, Figaro, claims he can’t marry until he learns who his parents are lest he is a nobleman. He shows everyone a distinctive birthmark he believes will help him locate his parents. Seeing the birthmark, Marcellina and Bartolo reveal they are Figaro’s parents. Since Figaro can’t marry his mother, he is free to marry Susanna.

With the economic fallout from the coronavirus pandemic, many commercial tenants are as desperate to get out of their lease agreements as Figaro was to get out of his agreement to marry Marcellina. But most tenants won’t find a solution to their agreement woes as easily as Figaro.

This article is part of a series on Demystifying the Commercial Lease. Previous articles in the series discuss Types of Leases, Letters of Intent, Base Rent, and Common Area Maintenance Charges, and Tenant Relocation Provisions. This article discusses what tenants should do if they need to end their lease due to the coronavirus pandemic.

How Coronavirus Has Changed Tenant Needs

Most states have closed nonessential businesses and issued stay-at-home orders due to the coronavirus pandemic. While these closures are essential to maintaining public health, they have a far-reaching impact on businesses.

Many nonessential businesses have moved to telecommuting. Where allowed, some have moved to a strictly delivery business model. Other nonessential businesses have been forced to stop operations entirely.

Due to the pandemic, many businesses can’t afford their rent payments. Other businesses have changed their operations, so they don’t need the type or amount of space they previously occupied. As a result, many businesses want to end or at least change their leases.

Few commercial leases allow the tenant to end the lease early without a fee or penalty. However, as landlords face potential high vacancy rates, they may be willing to negotiate more favorable terms or an early tenant exits under some circumstances.

Know What Your Lease Says

Before approaching their landlords, tenants should be familiar with their lease terms. Since every lease is unique, tenants should read their entire leases carefully.

Although few leases will allow for early termination without any payment, some lease terms may make it easier or more difficult for the tenant to end the lease or secure more favorable lease terms.

Lease Term

Tenants should know when their lease ends. If the lease ends in just a few months, the tenant might be able to ride it out and pay rent until the end of the term. Or the landlord may agree to an early buy-out if the tenant asks to terminate the lease early if there are only a few months left in the lease.

If the lease term has already ended, check whether there was an automatic renewal. If not, the lease may be month-to-month. Usually, tenants who have a month-to-month lease can terminate their lease by providing the landlord with one month’s notice.

Early Termination Provision

Some tenants negotiate early termination provisions into their leases. These provisions allow the tenant to end the lease after a specified minimum lease term.

Many early termination provisions require the tenant to pay a termination fee. The termination fee frequently is the amount necessary to reimburse the landlord for the unamortized value of the tenant improvements and of the real estate broker commission paid when the lease was signed. Where that is the case, landlords will already have incurred those expenses and may not be willing to negotiate a lower termination fee.

Security Deposit

Tenants should know whether their leases have a security deposit and, if so, how much is on deposit. Under extreme circumstances, the landlord might agree to apply a security deposit to rent to give the tenant temporary rent relief. Otherwise, tenants are likely to lose their entire security deposit if they breach the lease.

Continuous Operation or Abandonment Provision

Landlords want tenants’ businesses to remain open, particularly in shopping centers. Therefore, most shopping center leases contain “continuous operation” provisions that require the tenant to keep its business open for a minimum number of hours.

Usually, tenants are anxious to remain open because they aren’t making money if they are closed. But now, nonessential businesses can’t continuously operate in the leased premises. Those businesses are closed or have moved to telecommuting. Essential businesses, seeing sales dwindle as more people stay home, may have cut back on their hours.

Most other commercial leases include abandonment provisions. These provisions allow the landlord to declare a default and take over the lease if the tenant doesn’t occupy the leased premises for a certain period. Closure of a nonessential business due to coronavirus might be an abandonment under some leases.

Although the tenants can’t control these closures and reductions in hours, they still might put the tenant in breach of their leases. Being in breach might help, or it might hurt the tenant’s ability to negotiate an exit or landlord concessions. Tenants should understand their lease’s status (e.g., in breach, in good standing) before asking to end their lease.

Landlord Services and Amenities

Tenants aren’t the only ones who have obligations under leases. Landlords agree to provide services, such as cleaning, maintenance, HVAC, and security, or amenities such as parking, conference areas, a dining area, or fitness center.

Landlords aren’t likely to have control over what services and amenities they close during the pandemic. But the landlord’s failure to provide required services or amenities may support a tenant request for a rent reduction or abatement.

Reduced amenities or services also should translate to cost savings for the landlord, which should result in reduced common area maintenance (CAM) charges. Tenants that pay CAM charges should ask landlords whether there are cost savings and if so, they should be passed through to the tenants via payments toward CAM.

Force Majeure

In law, force majeure, which means “superior force,” refers to significant situations people can’t control, such as major weather events, strikes, and sometimes fires. A force majeure provision excuses a party from performing under the lease if “force majeure” events happen.

Force majeure clauses are common in leases, particularly where there are tenant improvements to construct. But the majority of lease force majeure clauses in leases only benefit the landlord, for instance, if the landlord can’t complete the improvements on time. Plus, force majeure provisions usually only delay contract performance, so they wouldn’t let a tenant get out of its lease.

For more information about how the coronavirus might trigger force majeure clauses, read my previous article Coronavirus and Contract Force Majeure Provisions.

Landlord’s Lien

Many commercial leases include a tenant pledge of its personal property at the property. This pledge gives the landlords a security interest or lien on the property, such as trade fixtures, desks, and computer equipment that the tenant may need to conduct business.

If the landlord has a lien on the tenant’s business property, the tenant may have difficulty canceling its lease and conducting business elsewhere. Further, if a tenant is permitted to cancel the lease, they should be sure that any lien on tenant property is released when the lease ends.

Guaranty

Landlords frequently require lease guarantees which require business owners to pay the rent if the business doesn’t. Tenants should be careful not to create personal liability for the business owners if the business doesn’t pay rent. Also, tenants should be sure to include the release of the guarantor as part of lease termination or rent reduction.

Sublease

Tenants should look at the lease to see whether subleases are allowed, and if so, whether landlord consent is required. In a challenging lease market, it may be challenging to find subtenants that will pay full rent. However, a tenant may be able to find a subtenant at a below-market rate that will cover part of the rent and provide some financial relief for the tenant.

Waivers and Amendments

Tenants should know what their leases say about waivers or lease provisions and lease amendments. Most leases state that a landlord waiver must be in writing. For amendments, leases usually require both the landlord and tenant to sign an amendment.

Evaluate Tenant Needs in Light of Lease Terms

Tenants next should evaluate their financial situation. Does the tenant need the rent to be deferred until the business starts back up? Or are the tenant’s finances such that a more drastic step, such as rent abatement or lease termination, is the only solution?

When evaluating their needs, tenants should remain mindful of any landlord’s liens or owner guarantees. Tenant overreaching or nonpayment of rent may backfire if the lease contains those provisions.

Communicate with the Landlord

A few tenants have leases that allow early termination. If a tenant decides to exercise its early termination right, the tenant should be sure to follow the required procedure to the letter. In particular, the tenant should send the notice of termination at the right time, and to the right people, at the addresses, and by the method required in the lease. If the tenant doesn’t deliver the notice in the required manner at the required time, the landlord might not allow the early termination.

Most tenants don’t have the right to end their leases early. Those tenants should approach the landlord with a request that will address the tenant’s needs. Tenants should be prepared to back up the request with financial statements and financial forecasts.

Tenants shouldn’t overreach or overstate their situations. Most commercial landlords are sophisticated or have professional property management companies. Tenant threats to shut down their business or file for bankruptcy won’t help the tenant’s request unless those possibilities are supported by financial documentation.

Tenants also should remain mindful of the landlord’s circumstances. Many landlords aren’t the “deep pockets” people make them out to be. The landlord probably has to pay employees, taxes, utilities, and mortgage payments. If tenants don’t’ pay rent, the landlord might face foreclosure. Plus, many commercial mortgages limit landlords’ ability to agree to lease changes.

Amending or Waiving Lease Provisions

If the landlord and tenant agree to concessions or early termination, it should be in writing and should follow any lease requirements for lease amendments. The tenant should have their attorney review the writing before the parties sign it.

In Marriage of Figaro, Figaro hid his contract with Marcellina from Susanna. Marcellina and Bartolo hid their circumstances from Figaro, and although not discussed in this article, Count and Countess Almaviva were also hiding things from each other. Once the truth was revealed, the opera ended well for everyone.

In a landlord-tenant relationship, the best results come when the landlord and tenant both are honest about their situations. Then, they can work together to find a solution that works for both of them.

This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.

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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