By Ashley Wingfield, shareholder, and Blake Hansen, associate at Brownstein Hyatt Farber Schreck, Denver
As the coronavirus (COVID-19) pandemic unfolds, retail locations globally are facing closures, business slowdowns and economic uncertainty. Accordingly, retail tenants and landlords are having difficult conversations regarding the possibility of rent relief. When approaching these discussions, landlords should keep the following considerations in mind:
- Individualized Responses: Landlords may offer tenants varied responses depending on the nature of each tenant’s business, the size of the tenant, lease term remaining, and mandated closures. Some landlords are requesting tenant financials in advance of, and during, rent relief periods.
- Abatement or Deferment: The type of rent relief offered by landlords can be diverse and tailored to each property and tenant. Landlords may offer full rent abatement, or rent deferral with a balloon payment or extended repayment plan. Additional months can be added to the end of the term at a higher rate. Abatement or deferral can apply to minimum rent only or also to common area expenses. Regardless, tenants will usually still be obligated to pay their own utilities.
- Length of Rent Relief: The abatement or deferral period should be expressly agreed upon and neither tied to an unknown period of pandemic nor future cessation of a government order.
- Tenant Aid: Landlords and tenants will need to agree whether any government aid or insurance proceeds that later become available to the tenant must be used to repay the landlord and offset any rent relief provided.
- Termination Rights: If the lease contains percentage rent, the landlord or tenant may want the right to terminate the lease if closures last beyond an outside date, or if the tenant’s business performance remains below a certain threshold for a specified period of time.
- Claim Waivers: Landlords should require an estoppel, waiver and ratification from tenants and their guarantors, confirming they have no claims against the landlord under the lease, and waiving any claims or defenses against the landlord with respect to constructive eviction, casualty, condemnation, failure of co-tenancies, landlord closures or other potential pandemic-related claims.
- Third-Party Approvals: Once the general terms for rent relief are established, landlords may still need the consent of third parties before they can sign a lease amendment. Partnership/LLC agreements, loan documents, other lease-related documents (e.g., franchisor riders, guarantees, sublease consents, tenant financing consents, and subordination agreements), and leases with other tenants may grant express approval rights over lease amendments or budget changes. The documents might also contain debt coverage or other income tests, fiduciary obligations, or specific co-tenancy and operational covenants that will need to be considered. Limited lease guarantees may need modifications to match new rent structures.
- Confidentiality and Disclaimer: Landlords should seek written assurances from tenants and guarantors that the negotiations and ultimate lease amendment will remain confidential. All correspondence should include a disclaimer stating that conversations and correspondence are considered confidential and non-binding until an amendment has been finalized and signed.
- Notice Provisions: If permitted by local law, consider requiring official notices to be sent solely by email to account for remote work and delivery delays. Expanding the addressee list can also help ensure notices are seen and handled quickly. The parties may wish to permit extensions of the rent relief period by email, where local law allows.
This article was written on April 2, 2020. Information is changing daily and some of the content included in this piece may have changed or been updated. Landlords should also be sure to check with local counsel before taking any actions.
