Apr 06 2020

Rent was due this past week, and many property owners are facing more delinquent renters and requests for rent concessions than they have seen in recent years. That trend isn’t likely to change anytime soon, as stringent governmental measures are taken to slow the spread of COVID-19. At the same time, those measures are also directly and indirectly limiting the ability of commercial and multi-family property owners to enforce rent and other lease clauses. The challenges facing landlords and tenants, practical and legal, vary by jurisdiction and are changing rapidly. Legal remedies remain available but each must be considered carefully. 

Challenges facing Landlords’ Tenants

We are finding that many businesses cannot access their business interruption insurance in a pandemic, making it difficult for commercial tenants to insure against not being able to use the premises to run their businesses to fund rent. Tenants receiving aid under the recently passed CARES Act may not be able to use that aid to pay rent, either because of competing demands for the use of the funds or because in the case of small-business tenants receiving payroll forgiveness loans, 75% of the loan funds received have to be applied to payroll expenses for the loans to be fully forgiven.

Challenges facing Landlords

Landlords are limited in the short term in a number of ways. Many courts around the country are postponing all non-emergency court hearings, including landlord/tenant disputes. Earlier this week, the federal government issued a 120-day moratorium on evictions from properties with federally backed multi-family mortgage loans. In more than 30 states, broader moratoriums on evictions are in place via orders from governors or state supreme courts, and municipal leaders are also issuing eviction moratoriums.  

Complicating matters is the fact that there is little formal structure in place for aiding landlords that are affected by this economic downturn. One exception for owners with applicable debt is that the Federal Housing Finance Agency has announced that Fannie Mae and Freddie Mac will offer mortgage forbearance for apartment owners if they suspend evictions for tenants who are “unable to pay rent due to the impact of coronavirus.”  Clients are noting that not accepting this forbearance does not relieve the apartment owner from the eviction and late penalty moratorium. 

Better Lending Support this Time?

An important consideration for landlords, however, is a difference in the lending environment between this economic situation and that of the Great Recession. Unlike the earlier crisis, early conversations (i.e., before a missed payment) may be productive. Lenders are being encouraged to be proactive and told that adjustments to lending arrangements will not expose them to the usual penalties for carrying “bad debt” for the next six months. We are informed that more capital is being put “on the street” for lenders to utilize.  
To get buy-in from your lenders, be prepared to discuss the measures you are taking and planning to take so your lender has a clear understanding of your circumstances. Be ready to talk about your cash flow and how you intend to keep up with other (non-debt) costs and payments you may still owe even while rent is abated. You should also share with your lender what concessions are you considering, for how long, and under what circumstances.

Deciding Whether and How to Allow Rent Concessions

There are a number of factors to consider when deciding how to address calls for rent concessions. First, lease provisions still matter. Understand first what the legal liabilities are of each party if you do not negotiate changes to the expected arrangements under the lease. Then consider appropriate adjustments you might be willing to make, under what circumstances. If you have a number of tenants on your property(ies) and you want to contextualize any concessions you might offer, consider establishing a simple request intake questionnaire to assess the tenants’ circumstances and their relevance to your tenants’ requests. Questions you need to ask yourself are:

  • Is it too early? Has the tenant been impacted yet or is it anticipating an impact that it wants to use your rental stream to delay? 
  • Is your commercial tenant’s use of space affected, or its income stream? Owners are less likely to entertain arguments that tenants are not getting the full benefit of their lease payments than that tenants’ actual businesses are adversely impacted. 
  • Do you need to treat all tenants equally? Can you efficiently assess tenant requests?
  • Are your tenants credit-worthy and/or “loyalty-worthy”? Is your reputation with these tenants important to keeping them as tenants or to the future marketability of your property?

If rent concessions (not merely the delay of rent enforcement) become a good option for you, there are a number of approaches to consider. Currently common options include forgiveness of a month or two of rent tied to some benefit to the landlord, like increasing the term of the lease by the same number of months. Some landlords are making arrangements to amortize the missed rent over a number of months once “things return to normal.”  Whatever arrangements you make, be sure to memorialize them in a lease amendment that helps both parties be clear about what is expected in the coming months.