Unlike economic challenges of the past, COVID-19 has immediately and vastly altered the commercial real estate industry on a global scale, and in ways the industry has not previously encountered with the purely economic downturns. One of the most apparent changes is evident when handling commercial office leasing; read on to better understand what the new commercial standard will be on key commercial office leasing issues.
Rules and Regulation- Enforcing Governmental Orders
COVID-19 brought swift, broad, and sweeping closures in most sectors of the real estate and business market, but those closures were often not clearly or effectively communicated.
Are landlords required to notify and monitor the actions of their tenants to ensure that they comply with governmental orders?
Unique circumstances aside, most landlords won’t incur much liability risk for a tenant’s failure to act in a way that violates a governmental order. Generally, the tenant is at risk of incurring fines and/or a loss of its business license. However, in an office building, a landlord may face risk with respect to use of premises and/or common areas by other tenants that may put other tenants at risk due to such unlawful use.
A landlord should heavily consider integrating additional rules and regulations for common spaces of their buildings in compliance with such orders. Some suggestions may include: limiting the number of people permitted in an elevator at once, requiring face masks be worn by anyone in the common areas, and/or adding hand sanitizer dispensers throughout the common areas of the building.
What is a landlord’s ability to force its tenant to comply with new rules and regulations?
In an ideal situation, the existing lease provides a landlord the ability to modify rules and regulations from time to time. If that provision is not intact, a landlord should strongly consider adding this flexibility in its new leases going forward.
Common Area Expenses and Janitorial Services
As a result of the ways in which the COVID-19 virus is transmitted, janitorial services need to be heightened universally, but especially within office space. In addition, Landlords will need to implement far more rigorous cleaning procedures, especially in common areas of the building.
Who should bear the burden of this cost? Can landlords pass-through these expenses as a common area expense?
Most of this will depend on the terms of the existing lease. Landlords should also be mindful of any common area expense caps included in existing leases when considering change in procedures and added expense. This will ultimately result in landlords balancing the increased cleaning costs and the risk of liability. In addition, landlords that provide janitorial services to tenants for leased premises will need to consider implementing more stringent and more frequent cleaning procedures.
Many notice provisions in leases are archaic, most notably with respect to disallowing electronic notices. However, the governmental closures and concern of transmission of COVID-19 necessitated the advancement of leasing protocols to evolve. Landlords and tenants should consider electronic transmission of notices being the new standard for transmitting notices, for the safety of both landlords and tenants (and their employees), and for efficiency of delivery the notice itself; mail and delivery services are not as reliable as they once were, and many tenants are not currently visiting the leased premises (as the standard was pre-COVID) on regular basis.
Return of Space and Office Remodels
The insurgence of COVID-19 has catapulted most of the business world into a fully remote-working capacity. This shift will likely result in a decrease in the need for office space, as many companies will continue to let many of their employees work remotely in some fashion. Tenants may be in a position where they would like to return a portion of the leased premises to the landlord in order to reduce rental costs, since the space is not actually being used. Immediately predating the pandemic, we experienced a striking shift in office design, leaning towards more bullpen or open space /shared workstation concepts. Given the ways in which COVID-19 is transmitted, tenants will likely be renovating existing space to create individualized workstations or office settings for employees, in order to safeguard from the spread of disease. Landlords can expect to see this shift when building out new space, and/or tenant improvement allowance requests from existing tenants to remodel existing leased premises.
While these shifts in the commercial office leasing space may be frustrating, they are a harsh reality and one which can be navigated with the appropriate guidance and changes to form leases.