Most agree that it is still too early to tell the real economic impacts of this coronavirus, but landlords are already receiving rent relief requests from tenants. One way to approach the problem is through a lease workout, which is an opportunity for the landlord and tenant to reevaluate the lease and better reflect any new practices. Ultimately, this could level the playing field for both parties to find a solution.
“Workouts can be an opportunity for landlords to level the playing field. Landlords should specifically evaluate whether there is an opportunity to improve the lease to reflect landlord’s current practices and/or additional landlord rights it requires to be coupled with the relief,” Sean Southard, a partner with the San Diego offices of commercial real estate law firm Crosbie Gliner Schiffman Southard & Swanson, tells GlobeSt.com. “Examples include trading rent relief for the addition of relocation provisions; limiting or revising extension/expansion provisions; taking back signage rights; narrowing or eliminating exclusive use protection, gross sales kick-out rights and co-tenancy clauses; and adding waivers of consequential damages and requirements to submit regular financial reporting.”
These workouts can be done in the event that tenants are unable to pay rent, but usually include an attractive deal to the landlord. Before a landlord agrees to change the lease, tenants must also prove that their inability to pay is related to the pandemic. “Tenants must recognize that the restructured lease/relief must work for the landlord, and must also consider the market conditions as applied to the premises,” says Southard. “Tenants essentially need to make the case that relief is warranted and in landlord’s best interest. Other aspects to be considered: How important is the lease to the viability of the tenant’s overall business plan? Is the tenant precluding itself from making an even better deal in the future? Is the tenant wedding itself to a marginal property that no longer comports with its business model?”
Rent relief amendments will be common in lease workouts, but there are some guidelines that Southard thinks are crucial. “Landlords should include the following in any rent relief amendment: a general release by the tenant of the landlord as to known and unknown claims existing as of the date of the amendment; a strong confidentiality provision sufficient to dissuade the tenant from comparing notes on any rent concessions granted by the landlord—the breach of which constitutes a default under the lease and causes any relieved rent to become immediately due and payable to the landlord; and possibly an ongoing right for the landlord to terminate if a more solvent operator can be located,” he explains.
Make sure to loop in the lender to the agreement as well. “Most importantly, the landlord, the tenant and in most cases, the landlord’s lender must all know the terms of the lease,” says Southard, adding that those terms include the length of the lease, tenants ability to make changes, exit strategies and cure rights.