Some Thoughts on How Covid-19 May Affect Commercial Real Estate

Some Thoughts on How Covid-19 May Affect Commercial Real Estate
Jay Janner /Austin American-Statesman via AP, File
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The COVID-19 pandemic has brought the country to a halt. Lockdowns and social distancing shutter a wide range of businesses, from restaurants and retail to gyms and office buildings. The entire commercial real estate sector will be affected, and the uncertainty hits tenants and landlords alike. Can I afford to keep paying rent? Can I accept less payment? Policymakers need to provide more guidance—and fast.

Here’s what we know.

The federal CARES act has created the Payroll Protection Program, offering loans to small businesses that commit to maintaining their workforce. Some of these loans can be used to pay rent and mortgages. This program’s initial funding is $350 billion, and more may be coming soon. And some national commercial mortgage relief, including rent forbearance, was already available to property owners with federally backed mortgages from the Federal Housing Finance Agency, Fannie Mae or Freddie Mac.

At the same time, state and local governments are unfurling a patchwork of initiatives. Los Angeles has passed a special ordinance that allows tenants to defer several months’ payment with no penalty, and places a moratorium on commercial evictions. Many city and state governments are considering similar laws, some more aggressive. New York legislators are reportedly weighing a bold plan to waive commercial rents for 90 days, while directly compensating landlords for some of the lost rent.

While we’re waiting for policymakers to act, use the time wisely to study your existing agreements. For leases, while the COVID-caused lockdown might constitute force majeure, in the vast majority of leases it only excuses the landlord’s failure to provide services to its tenants, and does not excuse the tenant’s obligation to pay rent.  

With that in mind, consider all of the pros and cons of defaulting on your obligations. Leases will have clear provisions governing late fees and penalties. But there are other less obvious consequences that could be buried in the documents. For example, the right to exercise an option or sublet space might be conditioned on the lease not being in default.  It is always better to work out payment arrangements with a landlord than simply defaulting on the rent.

Also, keep all of your lease deadlines in view as you consider options for relief. A negotiated three-month delay in rent payments won’t automatically extend other deadlines. For example, if the lease gives the tenant the right to terminate the lease early provided the landlord receives notice by May 1, if that deadline is not explicitly extended, the tenant will lose its option if it doesn’t act by the stated date.

Second, consult the terms of any loans you’ve taken. Many landlords and tenants have loans whose terms may impact their ability to fulfill their obligations in a lease. Landlords whose loans include borrowing covenants based on cash flow may be unable to offer rent relief. They need to go back to their lenders for relief in order to provide relief to their tenants. Tenants may find that their own incremental borrowing rates are affected if interest rates change or their credit rating is downgraded during the crisis.

Third, landlords should check their insurance policies. These may offer some relief, although typical coverage of events like property damage and business interruption don’t apply to pandemics. And even policies that do provide for government actions preventing normal business operations may not specifically cover actions taken in response to public health emergencies. Again, different policies use different language, and these details can matter a lot.

Some questions—like how long the pandemic will last—can’t be answered by real estate law. Other questions are answerable now. Every responsible commercial tenant and landlord should be carefully studying the specific terms and underlying legal principles governing the agreements that they’ve made. And government at all levels need to quickly resolve how to intervene and strike the right balance between tenants’ and landlords’ interests.

Marc E. Betesh is the founder, chairman and CEO of Visual Lease.

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