Commercial landlord responses to rent concession requests
As a result of the COVID-19 global pandemic, the world is facing a healthcare and financial crisis. The commercial real estate industry and, particularly, commercial leasing and lending, are in uncharted waters. Many American businesses are struggling to meet their commitments, including their rent and mortgage payments.
Covid-19 disruptions hampering businesses ability to operate leased spaces
This pandemic is impacting the ability of businesses to operate in their leased premises. Mandated government closures require many businesses to temporarily shut down their operations. Faced with limited or no cash flow and other cash management challenges, many companies are unable to meet their monthly rental obligations. In response to the COVID-19 Coronavirus pandemic, many tenants are approaching their landlords with requests for reduced or deferred rent, or rent abatement, to ease the pressure of strained cash flow. Requests to modify any “continuous operation” covenants are also topics for discussion.
Rent concessions seem like the obvious response but may have unintended consequences.
A landlord may be inclined to work with their tenant and agree to rent concessions for many reasons, including gaining or maintaining goodwill with a tenant, realizing the long-term financial benefits of maintaining occupancy and keeping a low vacancy rate, and the fact that a landlord’s ability to evict tenants may be restricted by government.
When contemplating such rent concessions, landlords must be conscious of potential unintended consequences due to covenant and default provisions in their loan documents.
Prior to making alternative arrangements with their tenant, landlords must first evaluate their own obligations to their lenders and determine the effect that any lease modifications may have on their loan covenants. Loan agreements often contain provisions that create restrictions or additional obligations on the landlord as it relates to their rights and obligations to perform under the lease, including the following:
- Notice to Lender Provisions. Requiring a landlord to give its lender notice prior to any amendment or modification of the lease terms.
- Negative Covenants under the Lease. Prohibiting a landlord from modifying a lease or giving rent concessions without Lender’s consent. Any such changes without the lender’s consent could be null and void absent the lender’s consent
- Debt Service Coverage Ratios. Requiring that a landlord continue to meet certain rent thresholds despite the circumstances obviating a need for certain tenant rent concessions.
- Financial Events of Default. Putting a landlord in default under its loan covenants based upon an adverse change in a landlord’s finances.
Landlords and tenants are both trying to determine remedial options in light of this global pandemic.
What are the appropriate measures you should take as a landlord or tenant facing COVID-19 disruptions? Communication is key. Ultimately, lenders, landlords, and tenants need to work together to minimize the overall impact of the virus on their legal and financial relationships.
- Landlords and tenants should review their lease agreements carefully to understand their rights in these unusual times and determine potential lease modifications that work for both of them.
- Landlords should review their real estate loan documents to determine if there are provisions which limit their ability to amend leases without lender consent.
- Landlords should reach out to their lenders and discuss: (a) what, if any, consequences may arise from exercising rent concessions, (b) whether rent concessions require lender consent, and (c) whether it may become necessary to amend the terms of their loan documents in order to more effectively respond to future tenant requests as the pandemic crisis continues to unfold.
- Lenders, landlord and tenants need to be cognizant of their local state’s statutes and mandates on exercising rights contained within loan documents or leases.
If you have any questions regarding the impact of COVID-19 on a lease or loan documents, please contact one of the McDonald Hopkins attorneys listed at the bottom of this alert.