What to Put in a Rent Relief Agreement
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.
Also, 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. Here are some of the key points your agreement should cover:
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.
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, put language in your agreement 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.
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.
For five more points to cover in your rent relief agreement, as well as a Model Lease Amendment that includes all eight, see “Get Eight Protections When Giving Tenants COVID-19 Rent Relief,” available to subscribers here.