Working With Struggling Tenants? This is What Landlords Need to Do to Protect Themselves

MIAMI—Even if a landlord offers rent relief to a tenant, there’s no guarantee that the retailer will survive.

“With the large retailers and probably more so with the small local businesses, there’s no certainty they will make it,” Steven J. Solomon, a locally-based managing shareholder at the law firm of Gray Robinson. “In certain markets, like Florida, the summer months are traditionally not strong. So if you’re reopening a business in June, there are no holidays and tourism is low and probably will be even further depressed by people’s reluctance to travel.”

But without any new retail businesses coming online, landlords won’t be able to backfill when businesses fail. They need to work through issues.

“It’s one of the most interesting situations that I’ve ever seen in my practice—when tenants and landlords can come together creatively to address each other’s issues,” Solomon says.

Eventually, the landlord may have to make a hard decision. “There’s going to be a point where a landlord needs to make a business decision because they can provide the accommodations, reductions, deferrals, and it might not be enough to jump start this business,” Solomon says. “Even if you gave them free rent, some are not going to make it.”

To protect themselves, Solomon advises his landlord clients to draft forbearance agreements, which include bankruptcy specific provisions. “There are provisions in a forbearance agreement that protect the landlord in the event of a tenant’s bankruptcy that would not otherwise be enforceable in the underlying lease,” Solomon says.

When a bankruptcy case is filed, the automatic stay is triggered. “The automatic stay is a provision of the bankruptcy code, which prohibits the continuation or commencement of litigation,” Solomon says. “The automatic stay is intended to give the debtor breathing room while attempting to reorganize. There are many lease agreements, which contain waivers of the automatic stay.”

Solomon says these provisions are commonly not enforceable because they are considered against the public policy.

When landlords and tenants are working through defaults favorably, and outside of the court system, a forbearance or lease amendment after a workout, which contains a waiver of the automatic stay, is more likely to be enforced by the bankruptcy court, according to Solomon.

The landlord can use this leverage in negotiations. “The landlord can propose to work through a modification to the financial requirements of a lease, but in exchange require terms which will make a resolution more streamlined in the event the tenant subsequently defaults,’” Solomon says. “After giving a tenant the opportunity to work through this difficult time, the landlord does not want to end up in protracted litigation or thwarted by a bankruptcy.”