\u201cIn any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing,\u201d said Theodore Roosevelt.<\/p>\n
By now, everyone recognizes the havoc and uncertainty of the Coronavirus\u2019s impact on almost every aspect of the commercial real estate sector \u2013 e.g., 630,000 US retail locations have closed, with the office and other sectors experiencing similar impacts. The duration of this crisis is uncertain, but in this evolving situation, every landlord, tenant, lender, and investor is processing and planning next steps with respect to their real estate relationship counterparties (while at the same time determining the applicability, if any, of insurance coverages; the applicability, timing, and requirements of government stimulus programs, such as the CARES Act; and countless other business continuity challenges). As April rents and debt payments come due or past due, many have already reached out to their counterparties (or their lawyers) to discuss short term solutions. These conversations are important to have.<\/p>\n
While each situation may have unique aspects, and the lease language and overall relationship between the parties play a significant role in the outcome, there are some possible approaches for landlords and tenants to consider at this time including the following:<\/p>\n
Rent Deferral:<\/em><\/strong> An agreement to defer all or a portion of rent (be it fixed or basic rent and some or all of the additional rent components \u2013 operating costs, taxes, insurance, etc. \u2013 due under the lease) for a defined period \u2013 say 60, 90 or 120 days. Deferred rent would then be repaid at some later date either in a lump sum or amortized (with or without an interest component) and repaid over a defined period once full rent commences \u2013 ideally, from a landlord\u2019s perspective, quickly following full rent commencement, but this may vary based on many factors, including the tenant\u2019s business operations and the landlord\u2019s asset \u201chold\u201d period. Restructured short-term repayment agreements deliver some immediate structure and \u201ccertainty\u201d while providing tenant rent relief and maintaining the landlord\u2019s cash flow under the lease, albeit restructured and extended, without adding defaulting tenants to the rent roll.<\/p>\n Rent Abatement\/Tolling:<\/em><\/strong> An agreement to simply abate or \u201ctoll\u201d rent (again, all or a portion of the various rent components) for a fixed period. After the abatement period, rent would recommence. This abatement approach provides tenant breathing room and cash flow relief but does not address the landlord\u2019s on-going obligations \u2013 debt service, taxes and operating costs (although the landlord may be seeking similar relief from some of these). Accordingly, a landlord may resist this or add the abatement or tolling period to the end of the lease term (at what may then be higher rents).<\/p>\n Rent Reduction:<\/strong><\/em> An agreement to simply reduce rent for a short period of time to get tenant over the \u201chump\u201d of the crisis while maintaining some level of cash flow to the landlord. While more economically favorable to the tenant than the landlord, this approach may provide other relationship benefits when coupled with other factors, such as an agreement to exercise (or not exercise) an extension or other option, future rent restructuring or other agreement.<\/p>\n Tapping the Security Deposit:<\/strong><\/em> An agreement or understanding that a landlord can apply some or all of the cash security deposit to rent shortfalls may provide a liquidity solution for both parties during the short term. The agreement could include replenishing of the security deposit at a later date or over time, or treat the reduction as a burn-down or burn-off.<\/p>\n Hardline<\/strong><\/em>: Some landlords and tenants will elect a more aggressive approach \u2013 exercising defaults and further remedies based on non-performance, or asserting that non-performance is excused or extended during the current Coronavirus pandemic based on lease language or legal doctrines (e.g., force majeure, impossibility or impracticability, frustration of purpose, etc.). In some situations, this approach may be appropriate. For instance, non-performance where a tenant is clearly not impacted or where the lease documents unambiguously prohibit such non-performance (e.g., a fully-net ground lease). It is also likely that a few will use this situation as a pretext for unrelated non-performance. Regardless of merit, these positions may simply set a difficult tone during and after the resolution, and the current court closures and restrictions (and likely backlog when those abate) won\u2019t easily or quickly allow for a judicial determination.<\/p>\n Other considerations include the following:<\/p>\n Realistic Expectations:<\/strong><\/em> Set and seek goals that are practical and reasonable in terms of economics and duration and workable for all parties to the extent discernible and practical. While unilateral actions may be or become necessary, a mutually agreeable short term solution to span this crisis will likely leave parties in better positions post-Coronavirus impact.<\/p>\n Transparency:<\/em><\/strong> In order to seek and obtain relief, the requesting party should be willing to provide some level of transparency and evidence of hardship if requested. At the same time, while a showing of need may be important, requests for this information should be realistic and practical given the situation and fit the scope of the tenant and situation \u2013 rather than an exhaustive list difficult to quickly provide in current circumstances. This shouldn\u2019t simply be a hurdle landlords use to reject requests, but landlords may need to explain, share or at least attest to tenant restructurings in order to obtain lender approval or latitude under loan documents to grant relief. Similarly, landlords may want to explain the limitations they face due to underlying financing or other restrictions.<\/p>\n Competent Planning:<\/strong> <\/em>While difficult to assess the duration of the current situation, any request for relief should be accompanied by a competent and professional showing that there is a current plan to bridge the crisis based on realistic assumptions and that relevant stakeholders are putting skin in the game.<\/p>\n