How to Give Tenants Future Pandemic Rent Relief
ADOPT SEVEN KEY PROTECTIONS IN YOUR LEASES FROM NOW ON.
As businesses reopen, landlords and tenants should be thoroughly preparing for the next public health crisis. One key question both sides will have to address in their future leases: To what, if any, kind of rent relief should a tenant be entitled if a new wave of COVID-19 or some other infectious disease emergency renders some or part of the property unusable for a substantial period of time?
Pandemic’s Impact on Leasing Objectives
The sudden and unforeseen economic upheaval caused by the worldwide COVID-19 crisis has changed leasing attitudes and compelled property owners and companies, large and small, to seek protections against future pandemics, notes veteran leasing attorney Robert Reichman.
Tenants are seeking rent relief and/or deferrals if a new pandemic prevents or restricts them from operating their business or vacating their premises at the end of the lease; landlords want protection in case a pandemic restricts them from operating their properties and providing services to tenants, including performing construction to prepare the premises for a tenant’s occupancy.
Reichman and his Greenspoon Marder LLP partner Jonathan Weiss have represented both landlords and tenants in the joint effort to develop fair and even-handed lease provisions that address the concerns of both sides. Our Model Lease Clause: Draft Fair and Balanced Pandemic Rent Abatement/Deferral Clause, attempts to strike an even-keeled approach regarding rent abatements and deferrals for future pandemics and health emergencies. Although the Model Clause addresses only the situation in which a tenant has moved in, begun operations, and started paying rent, according to Reichman, there are other periods the parties should also address in crafting a fair and balanced lease provision dealing with a pandemic risk, including:
- Before delivery of the premises;
- From delivery to buildout; and
- After the premises is ready for occupancy but before the first rent payment is due.
7 Key Protections
While each lease arises from the unique situations and relationships involved, our Model Lease Clause is an excellent template for a thorough and balanced future pandemic rent relief provision.
1. Defined Trigger Event
The Model Clause includes a clear and specific definition of the triggering event patterned after the previous COVID-19 outbreak in which a government health or “stay at home” order prevents or restricts the tenant’s occupancy or use of the property to conduct normal business (which the clause calls a “Public Health Closure” (PHC)) [Clause, par. a].
2. Minimum Disruption Period Before Relief
Landlords should go to school on the language clarifying that the PHC must last a minimum number of days for relief to kick in and seek to include similar (e.g., 10 days) or, preferably, longer run-up periods in their own leases [Clause, par. b].
3. Scope of Rent Relief
Scope of relief was among the most hotly negotiated issues during the recent crisis. The rent relief provided by our Model Clause is limited to fixed rent [Clause, par. b].
4. Rent Abatement
The other major issue in pandemic relief negotiations is whether rent should be deferred or forgiven. The Model Clause provides for a clever combination of both. The abatement piece starts on Day 11 of the PHC and is subject to a pair of caps (which can be negotiated up or down):
- An “annual abatement cap” of 90 days; and
- An aggregate “term abatement cap” of 180 days [Clause, par. b].
5. Offsetting Lease Extension
During the pandemic, many landlords have been willing to trade rent breaks for longer lease terms. The Model Clause does this in a direct way by tying the extension length to the amount of fixed rent abated via the formula:
days of extension = total fixed rent abated ÷ per diem amount of fixed rent payable during lease in final year rounded up to nearest whole number
[Clause, par. b].
6. Rent Deferral
To get a tenant to accept rent abatement caps, you might have to compromise and provide that when and if the amount of fixed rent abatements exceed either of the abatement caps, the fixed rent due gets deferred until the PHC ends. But as with rent abatement amounts, rent deferral lengths in our Model Clause (which can also be negotiated up or down) are capped at:
- 90 days, in the aggregate, in any 12-month period; and
- 180 days, in the aggregate, over the entire lease term [Clause, par. c].
7. Deferral Repayment Schedule
Our Model Clause provides generous repayment terms, with the tenant’s obligation to repay deferred rent, interest free, in 60 equal and consecutive monthly installments, starting in the 12th full calendar month after the PHC ends. But if there’s less than 60 months left on the lease when repayments begin, the tenant must pay the full balance by the time the lease expires [Clause, par. d].
Robert Reichman, Esq.: Partner, Greenspoon Marder LLP, 590 Madison Ave., Ste. 1800, New York, NY 10022; (212) 524-5000; firstname.lastname@example.org.
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