The COVID-19 outbreak, and the requirement that non-life-sustaining and/or non-essential businesses shut down, is having a material impact on the ability of many commercial tenants to perform their obligations under their leases, including payment of rent and, in turn, on landlords’ ability to pay their mortgage loans.

So what should a landlord do upon receiving a letter from a tenant asking for rent relief? Let’s put the legal issues aside for now and focus on the practical responses.

Here are the four main options:

• REJECT the tenant’s request and risk the tenant going in default for failure to perform under the lease, which could ultimately result in a lawsuit.
• DEFER rent and/or additional rent for a specific period of time with an obligation to repay it over the following several months or years.
• WAIVE the rent and/or additional rent for a specific period of time and add additional term to the lease.
• RENEGOTIATE the terms of the lease.

To find a balance between (a) meeting its obligations to pay-operating expenses, taxes, insurance and mortgage payments, and (b) helping their tenants stay in business, landlords may consider agreeing to a rent deferral rather than a full rent abatement. Under this scenario, the landlord would allow the tenant to defer the payment of rent during these challenging times.

It is recommended that a definitive period of rent deferral be established between the landlord and tenant, such as three months or when the tenant reopens for business. The landlord may consider only granting a deferral of the basic minimum rent, while requiring the tenant to continue paying operating expenses, taxes and utilities. Once the rent deferral period is over, the tenant would then be required to pay the deferred rent over a specific period of time, whether it be paid over six months, one year period, or spread over the balance of the then current term of the lease. This would allow the tenant some temporary relief while the landlord works with them in hopes of helping them survive their business and reopen in the leased premises.

The landlord may want to request financial information from the tenant, as well as request information as to whether business interruption insurance is available to the tenant, in order to evaluate the tenant’s request and determine who should or should not be granted rent relief. The landlord should also clearly set the terms of relief in a formal lease amendment and also take the opportunity to clean up any other issues in their lease agreement.

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