Workouts for Commercial Landlords and Tenants
As the COVID-19 pandemic continues to impact the Florida economy, commercial landlords and tenants are more frequently looking at ways to accommodate each other. Although these tenants are not getting the full benefit of their office space right now, most are still required to pay the rent. As the pandemic drags on, these businesses are faced with having to continue to pay rent despite the fact that they cannot fully utilize the space they are leasing.
Fortunately for these commercial tenants, there are ways to come to an agreement with their landlords that can make leases more affordable during these times of uncertainty and reduced income.
Seek Legal Advice
If you are a commercial tenant experiencing hardship right now, having an experienced real estate attorney review your lease document is the first recommended step to take. An experienced real estate attorney can advise you on the options you can take to maintain your business credit, your trading location and make any necessary pivots necessary to keep your business afloat financially.
For example, an experienced attorney can help you to interpret Force Majeure clauses in your commercial lease agreement, should such clauses exist in your document. In some cases, an unforeseeable and all-encompassing situation such as this pandemic qualifies as a force majeure. While these clauses are not always evocable as a reason not to pay rent in the general sense, they could form the foundation for certain landlord-tenant agreements that take the pandemic into consideration.
These arrangements include rental deferment, rental abatement, reduced rental payments, temporary expansions in permitted use, subletting and specific exit strategies that are easier on a tenants balance sheet than the standard early termination terms of the commercial lease agreement.
One option common among tenants looking to reduce their rental obligations is rental deferment. A deferment is essentially an agreement to pay later – usually via amortization of missed months over the remaining months of the lease. Often, the landlord will allow rental deferment in cases of demonstrated financial hardship, this means that it is not uncommon that a landlord will ask a commercial tenant to show proof of hardship via financial statements or some other evidence.
Another workout option for commercial landlords and tenants is for the parties to agree to a rental abatement. An abatement amounts to complete forgiveness of several months rent. This can either be done outright without extending the lease term or as an exchange of non-paying months for additional months being added to the lease term. As is the case with rental deferments, prior to a rental abatement the landlord may ask to see a bank statement or other evidence of financial hardship.
Reduced Rental Payment
In cases where a landlord does not agree to a rental deferment or a rental abatement, an agreement can be reached in which the commercial tenant temporarily becomes liable only for a portion of the rent due. There are different variations of this option. For example, perhaps a tenant can be liable only to pay the rental portion but not the utilities or common area maintenance (CAM). Alternatively, tenants might be asked to pay CAM fees only. The variation chosen depends on the discretion of the landlord. However, the outcome can be influenced by the tenant being represented by a real estate attorney with experience in commercial lease negotiations.
“… there are ways to … make leases more affordable during these times of uncertainty and reduced income.”
Expanding Permitted Use
Another way to manage through business hardships caused by the pandemic is for a tenant to branch out to other lines of business. In cases where these new lines of trade conflict with the permitted use section of the commercial lease agreement, the tenant will need to request that the landlord make a temporary exception.
In many cases, commercial landlords would prefer to expand permitted use rather than agree to an abatement, deferral or reduction in rent. However, requests to expand permitted use may run into regulatory hiccups such as local restrictive zoning and covenants that prevent the activity and are outside of the landlord’s control.
Requests to expand permitted use can also be complicated by exclusivity considerations given to other commercial tenants on the property. For example, if there was only one restaurant allowed to advertise for takeaway and delivery on the property, the fine dining restaurant on the same property may face challenges waiving the exclusivity of the other restaurant so that they can continue to do business during the pandemic. In such cases, it is highly recommended that tenants and landlords seek the legal advice of a Florida legal professional with experience in commercial leases. A legal professional will be able to interpret the commercial leases of the tenants and help all parties arrive at a conclusion that is beneficial to all.
Some businesses are thriving during the pandemic while others are less able to cope with the changes in demand and local regulations. Commercial landlords can guarantee payment of rent by allowing their current tenants to sublet their spaces to third parties who can still conduct business during this time. To do so, maybe a violation of a no-subletting clause in the commercial lease agreement and therefore an amendment may need to be made. It will also become necessary to draft and review a second agreement between the current tenant and the sub-letting third party. It is essential that these documents are carefully drafted and reviewed by a competent attorney with experience in commercial subleases to ensure that all parties are properly protected.
If all else fails, the tenant may need to terminate the lease early. Early termination fees may range from a few months to several years of rental and may have a serious negative impact on a tenant’s balance sheet. Unilaterally walking away from the lease can negatively affect a business’ credit rating and make forfeiture of any deposit certain.
An alternative to walking away from the lease is to negotiate a mutual agreement to vacate in tandem with an experienced commercial real estate attorney. Terms can be settled for an agreement that takes both the landlords and tenant’s concerns and means into consideration.
One solution might include a requirement to remain in the property until an assignment to a third party tenant can be made. This differs from a sublease in that the third party does not sublet from the tenant, but takes over from the tenant entirely.
South Florida Law
Are you a commercial tenant or landlord in a situation where your lease agreement is under strain by the business conditions caused by the pandemic or lockdown? The attorneys of South Florida Law can help you to avoid a commercial landlord-tenant dispute via negotiation and settlement that takes all parties’ best interests into consideration. Still, negotiating and unable to reach an agreement with your commercial landlord or tenant? Then South Florida law can also help. As a last resort, we will represent you aggressively in court, protecting your business in these uncertain times. Contact us today by phone (954) 900-8885 or via our contact form.