Get Eight Protections When Giving Tenants COVID-19 Rent Relief
While each lease is different, COVID-19 generally doesn’t excuse tenants’ duty to pay rent. But, in times of pandemic, having the lease on your side may not count for much. The simple fact is that for many landlords, strict enforcement of lease rent obligations is not a realistic option; it might even be illegal under the emergency decrees of some jurisdictions. That’s why rent relief has become the order of the day in so many parts of the country. If you do grant your tenants some form of temporary rent relief, be sure you make a legally sound agreement that minimizes your financial losses and protects your legal interests. Here’s how.
The Need for a Written Lease Amendment
Regardless of the type of arrangement you make, be sure to implement your rent relief agreement as a written lease amendment signed by both parties (as well as any guarantors) in accordance with the amendment provisions of the underlying lease. Strategy: Create a template for use with all tenants to ensure a degree of consistency of your rent relief agreements even if the business terms of a particular agreement vary by tenant. Like our Model Amendment: Give Tenants Temporary Rent Relief During COVID-19 Pandemic, your amendment should include eight clauses.
1. Rent Abatement or Rent Deferral?
For obvious reasons, temporarily deferring rather than forgiving some or all of the rent is the preferred form of relief for most landlords. But while deferral buys the tenant time, it also saddles it with heavy financial obligations when lease payments resume—for example, in the form of interest or additional rent on the back end, especially if the tenant is required to pay interest or penalties [Amendment, Sec. 1].
2. Tenant Use of Government Relief or Insurance Funds
One mutual advantage of deferring rather than abating rent is that the tenant may be able to take advantage of the new Coronavirus Aid, Relief, and Economic Security Act (CARES), specifically, the new Paycheck Protection Program (PPP), which lends money to businesses with 500 or fewer employees so they can pay their employees and rent. Best of all, PPP loans may be fully forgivable. Result: Landlords get the rent without saddling the tenant with new rent debts.
The tenant may also get insurance benefits under a business interruption policy. In any event, add language requiring the tenant to use any PPP or other government or insurance proceeds that later become available to repay the landlord and offset any rent relief provided [Amendment, Sec. 2].
3. Duration of Rent Relief
Three to six months seems to be the standard duration of COVID-19 rent relief arrangements. In any case, be sure to specify a start and end date rather than tying duration to an unknown period—for example, for as long as the pandemic or “stay home” orders last. You can always extend or shorten the term later as things develop. Also ensure that any deferral period and repayment date fall before the scheduled lease expiration date in the event you want to make failure to repay grounds for termination, or make the tenant’s agreement to extend the lease a condition of deferral [Amendment, Sec. 1].
4. Scope of Rent Relief
Provide relief only for basic rent, not additional rent, CAM, operating expenses, taxes, electricity charges, etc. And provide relief only for the rent installment that’s attributable to the named month. In other words, say the relief doesn’t include prior delinquent monthly installments of rent that come due during the named relief month. Example: Relief of May 2020 rent doesn’t cover the unpaid January 2020 rent that’s payable in May [Amendment, Sec. 1].
5. Remedies & Acceleration
Specify that the full amount of relieved rent becomes immediately due and payable in the event of:
- The tenant’s default under the relief agreement or underlying lease;
- The tenant’s assignment or sublease of all or any part of the premises (except for a sublet or assignment not requiring the landlord’s consent under the lease);
- Any earlier termination of the lease; and
- The tenant’s receipt of government assistance funding pertaining to payment of the rent [Amendment, Sec. 2].
6. Waiver of Tenant COVID-19 Claims
Have the tenant waive all rights, defenses, and entitlements related to COVID-19—for example, force majeure, impossibility of performance, frustration of purpose, denial of access, casualty, constructive eviction, loss of quiet enjoyment, and statutory remedies such as a government-mandated rent holiday [Amendment, Sec. 3].
The last thing you want is for tenants to compare notes with other tenants about the rent relief they got from you—or even disclose that they got rent relief at all. So, require tenants to keep the terms of the agreement, and the mere fact of its existence, confidential [Amendment, Sec. 5].
8. Email Signatures & Notification
In this time of social distancing, be sure to specify that signatures and required notifications under the agreement may be provided electronically via email, except where the eviction or other property laws of the jurisdiction require otherwise (note that many states have temporarily relaxed personal notification requirements for the pandemic) [Agreement, Sec. 7].
Get Necessary Third-Party Approvals
Once you negotiate an agreement with the tenant, be sure to check the following documents to see if they expressly grant third parties the right to consent to lease amendments, budget changes, or other revisions triggered by the relief agreement:
- Loan documents;
- Partnership/LLC agreements;
- Other lease-related documents, such as franchisor riders, guaranties, sublease consents, tenant financing consents and subordination agreements; and
- Leases with other tenants at the property.
See The Model Tools For This Article
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