Legal Blog

COVID-19 and Commercial Real Estate

Well, it’s officially May, and we are still riding the wave of COVID-19’s work-from-home campaign. Designers are creating chic facemasks and sweatpants are now trendy. Even more jarring in this new era-of-odd is that many landlords and tenants have been forced to close their doors and re-evaluate their business strategy with respect to leasing.

As a tenant, one of the biggest concerns right now is whether or not you and your business are deemed “essential.” Non-essential businesses have been forced to shut their doors until…well…until. Understandably, tenants who have been deemed “non-essential” are panicking. Without being able to operate their business, many tenants are left asking: How will I make money? How will I pay rent? Does my lease protect me from this? What about insurance?

Many tenants have already broached the conversation with their landlords – requests range from rent deferment to termination. What most tenants seem to forget in the midst of all of this is that, while their business may be deemed non-essential and they are struggling to pay rent, landlords are also struggling. Landlords are in the business of collecting rent and when tenants cannot pay, it leaves the landlords high-and-dry.

Landlords and tenants need to work together right now. We are navigating in the dark, in unchartered territory. Landlords do not want to lose tenants, and tenants do not want to fall into default and lose their premises. Negotiating amendments to leases providing for rent deferment for a period of time gives tenants a cushion to land on right now and landlords comfort that what is due is not lost, just delayed (like my many quarantine purchases).

As a landlord, when tenants approach, hat-in-hand, asking for help, what can you do to help them (and in turn, help yourself)?

  • Discuss the realities of their situation with them. Think about the value these tenants bring to your business and your building. Are these tenants who always pay their rent on time and are otherwise model tenants? Are these tenants with long-term leases? Are they significant tenants in the building? Are these tenants who will be able to not just climb, but catapult out of these holes when the stay-home orders are lifted?
  • Negotiate lease amendments. Some tenants are just looking for a little reprieve by way of rent deferment – landlords can defer rent for a few months and then collect via equal monthly installments as additional rent later on in the lease term with an extension of the term equal to the number of months’ rent is deferred or amortize the amount into larger rent payments later in the term.  Although less attractive a short period of rent abatement should also be considered. Another possibility (among others) is a combination of both rent abatement and rent deferment.
  • Think about what changes you can make to keep your tenants safe. Landlords need to think long and hard about the realities of the new normal in workplaces – upping cleaning services, installing hand sanitizer stations, and reducing density in workspaces. Part of the role of a good landlord is to have the ability to adapt to the marketplace and shift gears towards what would create a better atmosphere for happy tenants.

As a current tenant, what can you do to stay afloat?

  • Take a hard look at your financial health. How long can you pay rent before you bottom out? Are you close to bankruptcy, or is this just a speed bump? We know for many tenants, it is a fine line.
  • Discuss your situation with your landlord. Be honest! Many landlords are entitled to financial statements under your leases, so they will likely know if you misrepresent them.
  • Read your lease. The sticky situation, and what both landlords and tenants need to remember, is that your lease may not provide any protection for this kind of scenario. Luckily, pandemics do not just happen every day. Even thinking through every “what if” scenario for various contracts, lawyers never could have foreseen this kind of global phenomenon.  Landlords and tenants often ask why we may push so hard on a force majeure clause when something like this likely will not happen again in our lifetime. The simple answer? WHAT IF.  Lawyers, like most people, learn a lot through doing. Meaning that if you have been around for long enough, many lawyers, especially in the world of commercial leasing, have a “well, this one time…” for every clause in a lease where the lawyer has seen, first-hand, the protection that a seemingly simple provision can provide (or the disaster that can strike when that same provision is left out).  If your force majeure clause does not provide you with the relief you are seeking, as many do not, take a look at your cessation of services clause.  Some tenants have argued that government-mandated stay at home orders trigger a cessation of services that may excuse them from their obligation to pay rent.
  • Negotiate a solution that works for you AND your landlord. Remember: landlords are struggling and have their own bills to pay too. Do not ask for more than you need. If you only need a couple of months of deferment, only ask for a couple of months of deferment.
  • Read your insurance policy. Many tenants are finding that their business-interruption insurance is leaving them out in the cold. Unless you have a crystal ball, no one (including insurance companies) saw this one coming.  Discuss new policies and protections with your insurance advisor. Sometimes lightning does strike twice.

If you are lucky enough to be negotiating a new lease or the purchase of commercial real estate, use the leverage you have as a healthy, viable tenant or purchaser to incorporate stronger contract provisions like force majeure clauses.  Also, consider including COVID-19 clauses.

As a purchaser or seller of commercial real estate, what should you keep in mind?

  • Longer due diligence periods.  It has become more common for purchasers to negotiate longer feasibility periods and Covid-19 related extensions. Purchasers’ should anticipate and prepare for delays in obtaining surveys, appraisals, environmental studies, and conducting other due diligence caused by government-mandated closures and orders.
  • Communicate with your lender.  Purchasers and sellers should be aware that obtaining financing has increasingly become an issue for some borrowers as some lenders have tightened their underwriting standards or decided to suspend or terminate their commitments to lend.  Request or expect longer contingency and due diligence periods and maintain communications with your lender(s).
  • Remote Online Notarization.  Every state has different requirements and methods of remote notarization, and states are updating their requirements on an ongoing basis.  For example, in Maryland, there are several options for remote notary services, including using software such as DocVerify or having notaries witness the execution of documents using Skype or Microsoft Teams meetings.
  • E-Recording, Title Insurance, and Gap Coverage.  In the midst of the closure of recording offices and courts to in-person filings, many jurisdictions continue to accept the e-filing of deeds and mortgage documents.  The ability to record documents remains very fluid and varies by jurisdiction.  Transaction occurring in certain jurisdictions may find that a purchaser and lender’s ability to obtain a title insurance policy may be hindered by restrictions or closures of their recording offices.  Many title companies are providing mobile notarization or coming to your homes. Some title insurance underwriters are also offering gap coverage for a transaction where recordation of deeds and loan documents has been delayed. Gap coverage is usually provided on a case-by-case basis and may require certain additional requirements such as written authorization from the parties to release funds prior to the recordation and execution of an escrow agreement.

Not to sound too kumbaya, but…please be patient with one another. In a time where so much is uncertain, take a step back and walk a mile in the other side’s shoes. Collaborate with your landlord and your tenants to come up with positive solutions where neither side wins and neither side loses. Building a foundation of mutual trust and respect with one another now will lead to better relationships in the long run and maybe, just maybe, everyone wins.

With offices ranging from New York to North Carolina, we have patient, practical, and experienced attorneys here at Offit Kurman who can help guide you (landlords, tenants, purchasers and sellers, alike) through this “new normal”.

ABOUT JUNG KIM

Jung Kim is an attorney in the Commercial Litigation Practice Group. Prior to Offit Kurman, Jung worked at a local Washington D.C. law firm. His realm of practice centered around all facets of real estate law, from tax lien litigation to construction claims. His responsibilities included drafting pleadings and memoranda, researching relevant case law, and consulting clients on transactional and litigation matters.

 

 

 

 

 

 

 

ABOUT TALYOR HICKS

Darlington “Taylor” Hicks focuses her practice on Commercial Real Estate, Construction, and Business Law. She represents local, regional, and national clients in a variety of transactions ranging from lease deals and disputes to mergers and acquisitions. Her practice consists of drafting and negotiating commercial leases, lease amendments, and related documents for both Landlords and Tenants, drafting and negotiating asset purchase agreements for the sale of business practices, and advising clients on business formation and governance.

 

 

 

 

 

 

ABOUT OFFIT KURMAN

Offit Kurman is one of the fastest-growing full-service law firms in the United States. With 14 offices in seven states, and the District of Columbia, and growing by 50% in two years through expansions in New York City and Charlotte, North Carolina, Offit Kurman is well-positioned to meet the legal needs of dynamic businesses and the individuals who own and operate them. For over 30 years, we’ve represented privately held companies and families of wealth throughout their business life cycles.

Whatever and wherever your industry, Offit Kurman is the better way to protect your business, preserve your family’s wealth, and resolve your most challenging legal conflicts. At Offit Kurman, we distinguish ourselves by the quality and breadth of our legal services—as well as our unique operational structure, which encourages a culture of collaboration and entrepreneurialism. The same approach that makes our firm attractive to legal practitioners also gives clients access to experienced counsel in every area of the law.

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