Commercial Landlord-Tenant Issues During The Pandemic

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After several weeks of restrictive measures implemented to mitigate the effects of the coronavirus (COVID-19) pandemic—including the closure of non-essential businesses and orders to “shelter in place”—business owners are increasingly being required to make difficult decisions in the face of significant liquidity shortfalls. In particular, commercial tenants are weighing the decision to abandon premises they lease or to withhold rent due to their landlords, which decisions raise a number of legal issues. Tenants have considered various legal theories to support rent abatement and lease termination claims, though at this point in the process, many tenants have come to agreement with their landlords on interim relief.

Negotiated Settlements

As a consequence of the substantial, in some cases complete, loss of revenues for many tenants, commercial landlords have generally taken a pragmatic approach, which is also driven by limited access to the courts and a perception that courts will not be sympathetic to any attempt to evict tenants based on pandemic-related defaults. Another factor for landlords is the belief that it will be quite difficult to replace an existing tenant in this environment.

Many commercial landlords and tenants have agreed to modify the terms of their leases in order to provide short-term relief to tenants, especially those in the retail sector. Among other things, parties have agreed to (i) short-term (e.g., 30-90 day) rent deferrals, with deferred rent to be repaid either in lump sums or in installments with varying repayment terms, (ii) short-term rent reductions, (iii) lease extensions coupled with free rent to commence now (so called “blend and extends”), (iv) negotiated lease terminations (often for stipulated sums), and (v) some combination of the foregoing. Landlords typically prefer to defer rent (even if forgiven at a later date) rather than grant an abatement to preserve the landlord’s claim in a bankruptcy of the tenant.

Legal Theories for Lease Terminations and Rent Abatements

In the absence of a negotiated agreement, commercial landlords and tenants should carefully review their leases to determine whether a tenant has the explicit contractual right to terminate its lease or withhold rent. If none exists and the tenant is unable to – or for strategic reasons elects not to – abide by the terms of the lease, the tenant may try to assert a common law defense to non-payment or abandonment.