Like so many other areas, commercial landlords and tenants are facing significant impacts as a result of the COVID-19 pandemic. A common question that I have received from both landlord and tenant clients concerns the issue of ongoing rent payments due under leases and how the current pandemic might impact this obligation.
As a general rule, there are terms in most forms of commercial leases that strictly require the payment of rent and exclude that obligation from the benefit of a clause found in many contracts known as the ‘force majeure’ or ‘unavoidable delay’ clause. This clause can, in some cases, excuse a party’s failure to perform certain obligations under a contract owing to extraordinary circumstances that prevent them from doing so (for more on this issue see my colleague Greg Hatt’s blog, Force Majeure). The result of this is commercial tenants are still obliged to pay rents under their leases even in light of this extraordinary situation.
When assessing the obligation to continue to pay rent, I always recommend starting with a review of the specific provisions of the lease including the clause mentioned above. Are there any specific provisions or special rights that might apply and be beneficial to that party? For example, an ability to close a business for a period of time (known as ‘going dark’) is sometimes granted by landlords and one would need to carefully review those terms to determine if (a) it applied in the circumstance, and (b) if the related terms would be a benefit to the party seeking to rely upon it. For landlords, you may also wish to review specific provisions such as your ability to temporarily close parts of the common areas or your project and on what grounds those closures may be enacted. Leases generally provide broad discretion to landlords in this area for temporary closures but in some cases may restrict action which directly impacts a tenant’s ability to continue to conduct business from their premises. In my own experience, in most cases a commercial tenant will continue to be obligated to pay rent under their lease and, if this is not financially possible due to the current pandemic, tenants should consider proactively raising the issue with their landlords at their first opportunity. A number of landlords are making special accommodations for tenants with proven need such as offering rent deferrals or reductions in additional rent payments (reflecting the potential for some reduction or delay in the underlying operating costs in light of the closure of parts of buildings and deferral of various tax payments for example). That said, a tenant should understand that asking a landlord to waive or forego the rent in its entirety is not often possible for a landlord who depends upon those revenues to cover expenses such as mortgage payments on the building and operating expenses such as keeping property management and janitorial staff paid, utilities flowing and insurance in place.
In sum, a forthright and honest conversation between a landlord and tenant is often the best first step in dealing with this challenging issue.