COVID-19 continues to impact our communities and the global economy. The inevitable hardships that commercial landlords and tenants feared have painfully hit home. The consequences of stay-at-home orders, mandated closures of “nonessential” and “nonlife-sustaining” businesses and consumer concerns have combined into devastating economic times for landlords and tenants. In the face of seemingly unprecedented consumer absence, resulting revenue losses, related tenant defaults and the cascading consequences up the ownership and leverage chain, we all seek viable solutions. Even with the beginnings of business reopenings in progress, much damage has already been done. We explore in this article a holistic approach that would help guide all parties through various strategies to weather the crisis and emerge to the subsequent rebound we all hope to find.

Recognizing the Economic Reality

There is no way to avoid the reality: A high percentage of tenants are in economic crisis, which means a great many landlords are struggling as well. In ordinary times, a landlord’s instinctive wish, when faced with tenant default, is to turn to a traditional response, such as demands for payment, default and suit for damages and to evict. In some cases, that still remains the necessary solution. Unfortunately, when the economy has suffered a tectonic shift, these traditional approaches are more often dangerous and destructive. Imagine the pyrrhic victory of “success” with traditional remedies: a dark, devastated and untenanted asset. Hardly the preferred result. But, lack of rental income is an existential threat to landlords everywhere, and even more confounding for landlords who rely on the rent stream to service debt.

The results of this new economy, in terms of tenant behaviors, have run the gamut: from honest communications explaining an inability to pay, to “silent” defaults (tenants who will not communicate at all), to a variety of communications asking for relief. Some tenants have taken aggressive approaches, seizing the opportunity to magnify minor or manufactured issues as an excuse for default or justification for their demands for modified lease terms or termination. Inevitably landlords, faced with the sudden loss of asset income, are seeking relief from their lenders. For leveraged assets, much of what a landlord can in fact do to work with tenants depends upon what the lender will do for the landlord on the underlying loan relationship. By now, many landlords are securing some lender relief, such as forbearance and loan repayment restructuring to allow some time to pass without (or with reduced) debt service obligations. For landlords who have at least some of that lender relationship relief in place (or who have unleveraged assets), there are solutions to work on right now in response to the clamor of tenants needing help.

Though oft-repeated by now, all parties should explore available COVID-19 related relief from governmental sources. Consider seeking loans or other temporary relief, such as that made available from the U.S. Small Business Administration and pursuant to the CARES Act. But beyond those efforts, which may not be meaningfully fruitful, there is need for the parties to look inward—to themselves—to find a way forward. Below, we examine strategies from a variety of legal disciplines that landlords and tenants could adopt.

Solutions

There is no “one-size-fits-all” answer. Obviously each landlord will have different risk tolerances to satisfy and different goals to pursue, as well as different needs. A landlord without debt on the asset might have latitude to extend the tenant’s term, defer rent to a later date, abate some rent or combine all these relief possibilities, all as best accommodates the parties’ sensibilities.

The basics to finding solutions, include: the need to maintain open communication with each tenant’s principals, even if just to touch base and acknowledge the wish not to give up; to seek information about each tenant’s circumstances, finances and business plans going forward with changing social norms and customer concerns; and to contemplate nonmonetary changes to the lease and to common area standards and rules, which are calculated to help the tenant regroup and operate. Part and parcel to these negotiations should be consideration of credit enhancements in exchange for the relief, such as adding additional guarantors.

For those tenants who candidly respond and whose need for financial assistance is genuine, landlords can and, in our view, must move forward with some form of rental relief. Here are a few more specific thoughts for negotiation:

• Rent Deferral. The landlord may wish to give cash-flow relief for immediate payment obligations by agreeing to defer some rent. Deferral can be of all or a portion of the rent, with repayment either in a “lump sum” in the future or amortized as payback installments over time, commencing at some point in the future, all as the parties may agree. What a landlord may offer along these lines may heavily depend upon what indulgence is secured from the landlord’s lender and, if applicable, creditors.
• Abatement. The landlord may agree to abate a tenant’s rent for a specified number of months, with a condition that the tenant otherwise remains free of default.
• Extension. As part of the strategy of granting rent relief, landlords may wish to require term extensions with stipulated (higher) future rents—a partial or even complete so-called “back-end recovery.”
• Security Deposit Application. The landlord can suggest application of some of a tenant’s security deposit and require a later replenishment. This strategy should take into account both the psychological effect on the tenant, the credit effect for the landlord (losing some available security for future application) and practical legal considerations, including the risk of future tenant bankruptcy.
• Nonmonetary Gives. The landlord may offer changes in how the common area, sidewalks and parking operate to help facilitate the “new norms” and needs of tenants. For examples, relaxing or modifying rules or lease terms to facilitate curbside pickups, more convenient temporary delivery vehicle parking, exterior sales allowing for social distancing for customer interaction, changing hours of operation, customer-comfort assurances in terms of messaging in the common area about safety, cleanliness and courtesy.
• Combinations. The landlord should consider a combination of all of the above as part of its “offer” as it negotiates with its tenants.

After communications, discussions, consideration of the totality of needs and circumstances and available “gives,” there is need for action. Action to document the arrangements. Action to follow through and effectuate the new terms. Action to follow up with tenants and see how the new arrangements are helping. Action to monitor tenants’ compliance and efforts to honor the spirit of the deals struck. And, over more time, action to consider whether additional relief or changes are needed to continue the positive progress.

A Holistic Approach

The landlord will need legal help to effectuate the foregoing. We suggest a “holistic” approach— engage legal counsel with a broad set of practice concentrations to provide guidance on a variety of legal needs that inevitably arise. Landlords need more than just a real estate lawyer who concentrates in commercial leasing and who can help document the deals struck, through lease amendments and maybe letter agreements. There will be need for advice, guidance and practical business-focused suggestions from lawyers who concentrate in such areas as litigation, bankruptcy, creditors’ rights and remedies, banking and finance, real property valuation and taxation, contract law (especially for dealing with vendors), public health, governmental compliance, tax law and more. Landlords that consult with legal counsel with these diverse skills will be best positioned to secure their interests and a viable path forward with their tenants.

David S. Drobner, Jay Steinman and Phillip M. Hudson III are partners at Duane Morris in Miami.

Reprinted with permission from Daily Business Review, © ALM Media Properties LLC. All rights reserved.