10 Key Leasing Lessons from the First Phase of the COVID Crisis

The COVID-19 crisis has forced landlords and tenants around the country to rework their leases. And while the process will continue for months and even years, we’ve reached the point where we can step back and consider the big-picture leasing lessons from the tumultuous months of March, April, and May. Because we know you still have tons of work to do, we’ll keep it brief by boiling down what leasing experts and attorneys steeped in the process say they’ve learned and will carry forward with them in future lease negotiations and renegotiations.

10 Lease Renegotiation Best Practices

1. Importance of Tenant Communication: Landlords were more likely to grant concessions to tenants that were able to clearly articulate their COVID-19 financial hardships.

2. Importance of Tenant Financial Statements: One of the most effective ways for a tenant to secure concessions and gain landlords’ trust was to provide financials demonstrating their COVID-19 losses and the strength of their core business.

3. Forbearance vs. Forgiveness Flexibility: In many cases, the question of rent forbearance vs. rent forgiveness wasn’t an either-or but a hybrid of both—for example, 50 percent rent abatement in April and 100 percent deferral of May rent until December.

4. Givebacks for Rent Relief: In return for rent relief, many tenants were willing to make strict compliance with future repayment of deferred rent a condition for renewal, first refusal, improvements, and other lease rights. Other common givebacks traded for rent breaks included:

• The narrowing of exclusives, such as removal of the exclusive right to sell certain items;
• Stricter continuous operations requirements, such as the requirement to have an online presence or provide deliveries to customers; and
• Loosening of co-tenancy protections.

5. Cross Default Strategies: Some landlords traded concessions on one lease for givebacks on other leases between the parties at different locations—for example, rent abatements for financially strapped New York tenants in exchange for rent increases on their more prosperous Texas locations. In addition, landlords introduced “cross default” clauses in their leases to give them greater security by providing that if the tenant is in default under one lease it would also be deemed in default under other leases with that landlord.

6. PPP Facilitates Agreement: A key concession demanded by landlords and agreeable to most tenants was the tenant’s agreement to seek federal Paycheck Program Protection (PPP) payments and promise to use the rental portion of the proceeds to pay or repay the landlord.

7. Business Interruption Insurance Didn’t Help: Similar concessions relating to business interruption insurance proceeds were far less frequent due to how few tenants actually had business interruption policies covering their COVID-19 losses (mostly because COVID-19 losses weren’t deemed a covered loss under the policy).

8. Security Deposit Substitutes: Even where permitted by law, landlords were generally reluctant to draw on security deposits to cover a tenant’s rent arrears, especially in April when it was unclear how long the COVID-19 disaster would last. In many cases, the sides worked around the problem by having the tenant provide alternative security such as personal or corporate guarantees or letters of credit.

9. Landlords Stand Firm on Operating Expenses: While landlords showed flexibility on basic rent, they generally insisted that tenants continue to pay their share of operating expenses, in many cases at the pre-COVID-19 rate even though tenants strongly suspected that the shutdown of nonessential businesses caused operating expenses to decline. And while most tenants lacked the leverage and lease language to demand givebacks or perform audits, they’re likely to demand greater operating expense restrictions and transparency in the next round of lease negotiations.

10. Landlord Demand for Longer Lease Terms: One pattern that is likely to continue long into the post-COVID-19 era is the greater willingness of landlords to prioritize security and offer lower rents for longer lease terms.

Takeaway: COVID-19 Bred More Collaboration than Conflict

Perhaps the biggest takeaway from our unscientific survey of lease re-engineering during COVID-19 is how, for the most part, landlords and tenants seem to have pulled together in the quest to find solutions.

“The sides quickly realized that this wasn’t the time for a fight and that each one’s survival depended on the other,” notes veteran Ontario leasing attorney and consultant Steve Messinger. “The focus of the dialog was less about the technical legal requirements of the existing lease but of finding a way to make it work so both sides could move forward.”

Bottom Line: COVID-19 isn’t going away, but at least the momentum and mutual trust built up in the first three months of the crisis will help both landlords and tenants in the difficult days ahead.

Insider Source

Stephen Messinger: Messinger Consulting Services; (416) 436-9526; messingerconsulting@gmail.com.