Pandemic Playbook: Guidance for Commerical Landlords and Tenants in the Coronavirus Era

As a result, commercial tenants are increasingly left with little to no revenue, uncertain as to if and how long they will be able to afford their rent and what options they have to delay payment of rent. Many states, including California, and local jurisdictions have taken action to prohibit landlords from evicting tenants based on the nonpayment of rent, including the imposition of moratoria. Meanwhile, commercial landlords are faced with the uncertainty of whether they will be receiving rent from their tenants and if they can make their own payments, such as loan payments, utility expenses, and property taxes, any or all of which may be dependent on rental income.

To address such circumstances, commercial tenants and landlords should review their leases to determine if there are any contractual provisions that excuse the nonpayment of rent. Most of the time, the tenant will not be excused from nonpayment of rent for coronavirus-related impacts, but each lease must be reviewed carefully. Many tenants are looking to force majeure provisions, but these generally do not provide the type of relief that tenants are seeking as they do not cover the nonpayment of rent. However, a force majeure provision may excuse delays related to tenant improvements or other construction.

Although many jurisdictions have adopted eviction moratoria, tenants must still meet the threshold requirements to qualify. Typically, the ordinances require a substantial decrease in business income, for that decrease in income to be caused by coronavirus, and for that decrease in income to be documented. Significantly, moratoria do not excuse tenants from their obligations to pay rent. Instead, they prohibit landlords from evicting tenants for nonpayment. In other words, the tenant will still be responsible for paying the rent at some point down the line. Unless a landlord agrees otherwise, this basically amounts to a deferral of the rent.

Assuming a tenant meets the standard required to avoid being evicted for nonpayment of rent, there may be other negative contractual implications even if eviction is not one of them. For example, a tenant may be deprived of its option to extend the lease because nonpayment is considered a default that nullifies the option. In addition, the tenant may still be liable for late fees or other penalties. If there is a guarantor under the lease, the landlord may also still have the right to go after the guarantor to seek payment of the rent. The ordinances are not drafted to prevent these types of implications.

Tenants should also confer with their insurance providers to determine if they provide any coverage for coronavirus-related impacts. Most of the time, there are exclusions from coverage for epidemics and other details that render insurance, such as business interruption insurance inapplicable. However, it is still worth checking.

The landlord also needs to consider all the implications that a change in its contractual relationship with the tenant might have. In other words, are they bound by any loan documents or comparable financing arrangements that contain covenants or other provisions that could be impacted by the nonpayment of rent? Is third-party consent required pursuant to such documents before the landlord can agree to modify the rent schedule? All of these considerations will impact a landlord’s decision-making.

Lastly, but perhaps most importantly, landlords should consider the market. If a tenant is unable to pay rent, is it in the landlord’s best interest to evict the tenant or to attempt to work out some sort of rent relief or rent adjustment to maintain the tenant? Restructuring an otherwise problematic lease may be a workable and reasonable alternative. For example, landlords can agree to rent deferrals in exchange to extend the lease term or an increase in the amount of rent down the line.

In any event, if a tenant is weighing its options in connection with an outstanding or upcoming rent payment, the tenant should reach out to the landlord as soon as possible to determine if a rent adjustment schedule is possible. This can take many forms, from a partial deferral of rent to a complete abatement of rent. Any agreement or modification of the lease terms should be well documented to prevent any confusion or litigation of the issue down the road.