Commercial tenants: remember that extensive and wholly uninteresting document entitled “Lease Agreement” that you scanned, signed and then shoved into a file folder and never thought of again? Well, it’s making a comeback.
If you are one of the many businesses struggling to pay your rent due to the economic effects of the COVID-19 pandemic, your lease agreement should be one of the first resources to which you turn for guidance.
Like all contracts, commercial leases typically include the standard who, what, where, when and why provisions of an agreement between a landlord and tenant. But they generally go beyond that as well and many leases, especially long-term ones, also contain lengthy provisions outlining the rights, obligations and, perhaps most importantly, protections for both landlords and tenants.
One such protection that is at the forefront of discussions in the midst of the COVID-19 pandemic is the “force majeure” clause. Force majeure clauses address a variety of catastrophic events beyond the parties’ control that, if they occur, may relieve one or both parties from performing their contractual obligations. To be effective, however, the clause must contain the specific event that a party is claiming occurred. Applied to today, whether the COVID-19 pandemic is sufficiently similar to the events listed in a lease agreement’s force majeure clause, such that performance might be excused, is completely dependent upon the particular language in the agreement and requires close examination.
Other provisions of a lease agreement might also lend some guidance as to how parties should proceed if an unforeseen event prevents either party from fulfilling its obligations. At the very least, the lease agreement can act as a catalyst to a conversation between a tenant and a landlord about the tenant’s realistic ability to pay rent. It goes without saying that these conversations can be uncomfortable and downright stressful for both tenants and landlords. Yet many landlords are receptive to proactive, open dialogue, and may be willing to work out a modified agreement with a tenant rather than maintain an uncompromising position in which both parties lose.
Modified agreements between a landlord and tenant can take many forms and are dependent upon the specific needs and abilities of the parties involved. Some of the more popular modifications are to: (1) reduce a tenant’s monthly rent payment by, for example, temporarily reducing or deferring interest rates or waiving late fees and penalties; (2) completely defer rent obligations for a period of time; (3) apply any security deposit to rent; and (4) extend the lease term to collect additional rent on the back end of the agreement. It is important to note, however, that each of these options may come with unique financial consequences, such as increased interest rates in the future or additional costs or fees, and tenants should be sure that they fully understand the modified agreement before entering into it. Moreover, any modification should be documented in writing and executed in the manner outlined in the current lease agreement.
In addition to knowing their rights and obligations under the lease agreement, tenants should also stay on top of legal developments. For example, currently in effect in New York State is a moratorium on COVID-19 related commercial evictions and foreclosures until January 1, 2021.
With this moratorium, however, tenants should be careful to not confuse an inability to evict with an inability to cancel a contract. Tenants who simply stop paying rent with no prior communication with the landlord might not be at risk for immediate eviction, but most certainly are at risk for breaching the lease agreement. This can then allow a landlord to terminate the lease agreement and eventually evict the tenant once the moratorium is lifted, even though the tenant might, at some point in the future, be able to pay the overdue rent. Again, the specific terms of the lease agreement will govern.
In approaching these difficult conversations with your landlord, preparation is key and your lease agreement is your best resource by which to offer to your landlord meaningful suggestions and solutions that are aligned with your financial realities. Confronting this issue in a proactive manner, instead of waiting for the situation to deteriorate, can save a landlord-tenant relationship and set it up for long-term future success.