September 15, 2020 8 minute to read ∙ 1900 words

COVID-19 Commercial Leasing Crisis Management Checklist: Part 1, Tenants

Reprinted with permission from Thomson Reuters Practical Law, Real Estate. © 2020 by Thomson Reuters. All rights reserved.

The 2019 novel coronavirus disease (COVID-19) global pandemic has created challenging times for everyone. Commercial landlords and tenants are concerned with how this crisis affects their business operations. This checklist addresses key considerations for tenants evaluating their rights and remedies under commercial leases. Next month we will present a checklist for landlords.

Determine the Impact of COVID-19 on the Tenant’s Business

  • Evaluate the specific impacts of COVID-19 to the tenant’s business, based on factors such as:
    • the type of lease;
    • the location of the premises;
    • governmental orders in place for that location; and
    • whether the business is an essential business.
  • Where appropriate, seek clarification as to whether the tenant’s business is essential.

Tenants Operating Essential Businesses

  • If operating an essential business (as defined under applicable government order):
    • continue business operations;
    • implement remote working arrangements where feasible; and
    • enforce social distancing policies for all persons at the premises.
  • Review the lease and contact the landlord to confirm:
    • access rights;
    • cleaning specifications;
    • rights to use common areas;
    • building security;
    • rights to make temporary alterations; and
    • landlord or property manager business continuity plans and ability to continue to provide landlord services under lease.

Tenants Operating Non-Essential Businesses

  • If operating a non-essential business (as defined under applicable government order) confirm:
    • requirements to cease business operations at the premises;
    • ability to continue business operations with remote employees and contractors; and
    • ability to access the premises for certain minimum activities, such as maintaining inventory, processing payroll, and IT support.
  • Review the lease and contact the landlord to confirm:
    • access rights;
    • security of the premises; and
    • cleaning specifications.
  • If operating a non-essential business and facing immediate financial hardship, such as retailers and restaurants, review the lease and applicable law to confirm:
    • rent obligations;
    • possible defaults and landlord remedies;
    • operating requirements;
    • rights to suspend operations; and
    • compliance with law obligations.
  • Contact the landlord to negotiate for:
    • rent deferrals or abatement; or
    • lease amendments.

All Tenants

Keep track of:

  • Dates and times of all disruptions to the tenant’s business, including the dates of all governmental orders mandating that:
    • employees and contractors work remotely;
    • the tenant must implement social distancing, enhanced cleaning, or other measures;
    • the tenant must reduce or stop all business operations at the premises;
    • the building within which the premises are located must close; or
    • the premises must close.
  • Interruptions of required landlord services required under the lease, such as:
    • building amenities;
    • security;
    • cleaning; or
    • utilities.
  • All attempts to mitigate losses, such as:
    • efforts to develop new business activities permitted by the lease;
    • efforts to develop new business activities not permitted by the lease;
    • attempts to divert existing business to online or telephonic services; and
    • applications for government relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) or another stimulus bill.
  • The financial impact of the business disruption to justify requests for:
    • rent deferrals; or
    • rent reductions.

Identify All Lease Provisions Impacted by COVID-19

Financial Obligations

  • Understand all financial obligations, including:
    • based rent or fixed rent;
    • percentage rent;
    • real estate taxes;
    • common area maintenance or operating expenses;
    • building services;
    • utilities; and
    • other additional rent items.
  • Identify all payment dates, including:
    • any payments that are already past due;
    • payments that have been invoiced but are not past due; and
    • all future payments.
  • For percentage rent leases, confirm when gross sales reports and payments are due.
  • Confirm any notice and cure periods that apply to late rent payments.
  • Identify any penalties for missed payments, such as:
    • late fees; and
    • default interest.

Operating Covenants

  • Identify all covenants by the tenant to operate a business in the premises.
  • Retailers, in particular, often must:
    • open for business during agreed hours;
    • maintain adequate staffing levels; and
    • maintain stock.
  • Confirm any landlord remedies for violations of operating covenants, which may include:
    • rent penalties; and
    • default remedies.
  • Confirm any applicable exceptions to operating covenants, such as:
    • force majeure; or
    • co-tenancy violations.

Build-Out Obligations

  • If the tenant is building out the premises, confirm the consequences of not completing the construction on time, such as:
    • penalties; or
    • rent commencement, whether or not the construction is complete.
  • If the landlord is building out the premises, confirm the tenant’s remedies if the landlord fails to complete the construction on time, which could be:
    • rent abatements;
    • rent penalties;
    • rights to postpone opening; or
    • termination rights.
  • Confirm the effect of force majeure events on the construction timetable.
  • Confirm whether completion is realistic if:
    • workers are unavailable; and
    • local authorities have closed permitting offices and suspended inspections.
  • If the parties discuss proceeding with construction on a revised schedule, seek assurances that the landlord can timely:
    • allow access to the building, including loading docks and elevators;
    • sign permit applications;
    • review and approve plans; and
    • disburse any tenant allowance.

Maintenance and Repair Obligations

  • Confirm any maintenance or repairs for which the tenant is responsible, including:
    • previously scheduled work; and
    • regularly scheduled work, such as HVAC maintenance contracts.
  • Identify rights to implement safety controls for workers accessing the premises.
  • Consider negotiating with the landlord to defer non-essential work.

Cleaning and Other Building Services

  • Confirm whether landlord can continue to provide services as required under the lease, such as:
    • security;
    • cleaning;
    • utilities; and
    • access to building amenities.
  • Confirm the parties responsible for cleaning:
    • the premises; and
    • any common areas.
  • Identify tenant rights to supplement cleaning services, either:
    • by requesting additional cleaning to be supplied by the landlord; or
    • by contracting directly for additional services.
  • Understand tenant obligations to pay landlord expenses for enhanced cleaning, whether or not requested by tenant or recommended by health authorities.
  • Review tenant remedies for landlord’s failure to provide services and any excuses to landlord’s performance, such as:
    • force majeure; or
    • compliance with law.

Security

  • If the building or premises are closed:
    • confirm tenant’s responsibilities to secure the premises;
    • confirm tenant’s rights to implement additional exterior security services to monitor vacant premises; and
    • consider steps to take to avoid landlord claims of abandonment of the premises.
  • If the premises remain open:
    • confirm tenant’s rights to impose security restrictions on non-employees and landlord parties; and
    • understand security controls implemented by the landlord for the building and, if appropriate, negotiate for exemptions.

Access

  • If the premises remain open:
    • confirm tenant rights to restrict access to the premises to customers and the public in accordance with public health advisories;
    • understand security controls implemented by the landlord for common areas, including delivery facilities and conference facilities; and
    • negotiate for appropriate exemptions from building closures.

Building Amenities

  • Confirm the landlord’s rights or obligation under government orders to suspend or close building facilities, such as:
    • fitness centers;
    • cafeterias;
    • day care facilities; or
    • shuttle buses.
  • Identify any reimbursements that may be due to the tenant, or its employees.

Lease Deadlines

  • Identify all deadlines that the tenant might miss because of closures of the tenant’s business, such as deadlines to:
    • exercise renewal options, including deadlines to request arbitration of fair market value;
    • exercise premises expansion or reduction options;
    • request audits of landlord expenses; and
    • submit sales reports.
  • Consider:
    • exercising options early (including as part of an overall lease amendment); or
    • negotiating for some or all deadlines to be tolled.

Permitted Uses

  • Review the permitted use definition. This definition may:
    • be limited to a defined use, and not permit any other uses;
    • permit other related or ancillary uses; or
    • permit any lawful uses.
  • Confirm any landlord consent rights over changes in the permitted use, including any consent standard. To mitigate losses, many tenants are exploring possible alternate business uses for the premises. For example:
    • retailers may expand online sales and delivery services;
    • restaurants must move to delivery or online pickup, or may convert to ghost kitchens; and
    • factories may be encouraged (or ordered) to retool to create medical equipment.
  • Understand any prohibited uses or exclusive use restrictions that may be violated by mitigation efforts and obtain the landlord’s consent if necessary.

Co-Tenancy

  • Confirm any applicable co-tenancy thresholds.
  • Identify rights flowing from a co-tenancy violation, which may include rights to:
    • delay opening for business;
    • suspend business operations; or
    • pay reduced rent.
  • Confirm any time limits (such as 90 or 180 days) on tenant remedies before the tenant may:
    • reopen for business;
    • pay full rent; or
    • terminate the lease.

Insurance

  • Review existing insurance policies to identify possible claims.
  • Understand that insurers may seek to deny coverage based on the existence of a pandemic and governmental actions to combat it. For example, property insurance with business interruption may:
    • only provide coverage if there is physical damage to property; or
    • contain specific exclusions for viruses.
  • Track any future law changes that may change insurance coverage (such as requiring insurance companies to pay out for certain COVID-19 related claims).

Force Majeure

  • Confirm whether the lease excuses or permits delays to performance under the lease resulting from force majeure or unexpected delays. Leases may:
    • contain a general force majeure provision; or
    • specify within a specific provision that force majeure may apply to that provision.
  • Identify any specific clauses that are subject to force majeure delays, which may include:
    • operating covenants;
    • tenant improvements; and
    • repairs.
  • Identify whether the force majeure definition includes terms directly applicable to COVID-19 impacts, such as:
    • pandemics;
    • quarantine; or
    • government orders.
  • Confirm whether the force majeure definition applies to financial obligations.
  • Identify any maximum periods for which force majeure delays are available (some leases may cap total delays at 90 or 120 days).

Landlord Remedies

  • Review landlord remedies for a tenant default.
  • Confirm whether landlord’s exercise of its remedies is stayed by any government orders.

Deliver Necessary Notices

  • Give the landlord all notices required by the lease, such as notices of:
    • a change to applicable laws;
    • a change to business hours;
    • a closure of business operations;
    • a change in use;
    • proposed alterations to implement social distancing measures; or
    • additional signage.
  • Consider any notices required under the lease or applicable law to advise the landlord of potential tenant defenses, such as:
    • force majeure;
    • impossibility;
    • frustration;
    • constructive eviction; or
    • temporary takings.
  • Confirm the lease requirements for:
    • applicable notice deadlines;
    • delivery methods; and
    • notice parties.
  • Provide additional notices as facts develop.

Negotiate a Lease Amendment

  • Contact the landlord at the earliest opportunity, ideally before the tenant is in default.
  • Request modifications to the lease that are:
    • necessary;
    • proportionate; and
    • supported by a business case.
  • Expect the landlord to be concerned about the continuing viability of the tenant.
  • Anticipate that the landlord may request information regarding:
    • the tenant’s financial condition and status, including recent bank statements, financial statements, and tax returns;
    • the tenant’s current and anticipated business relationships with its lenders, vendors, and customers;
    • the tenant’s ability to operate when Covid-19 closure orders are rescinded; and
    • the status of the tenant’s applications for emergency financing, or for government grants and loans under the CARES Act.
  • Expect the landlord to negotiate for new or expanded guarantees from:
    • the tenant’s parent company; or
    • a principal of the tenant.
  • Ensure that the amendment includes all necessary landlord consents.
  • Ensure that the amendment drafts reserve all of the tenant’s claims and defenses.

Lease Termination

  • Consider whether it makes sense for both parties to terminate the lease, such as if:
    • the tenant has a termination option;
    • the term is expiring soon, and the tenant is unlikely to reopen; or
    • the tenant is ill and unable to operate the business.
  • Negotiate end of term obligations, such as:
    • surrender of the premises to the landlord;
    • marketing the premises;
    • identifying and repairing damage to the premises; and
    • settlement of unpaid present and future rent obligations.

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This article originally appeared as “COVID-19: Commercial Leasing Crisis Management Checklist (Landlords)” on Thomson Reuters Practical Law, Real Estate. © 2020 by Thomson Reuters. Thomson Reuters is a Sponsor of the GPSolo Division, and this article appears pursuant to the Division’s agreement with them. This article is not an endorsement by the ABA or the Division of any Thomson Reuters product or service.

Reprinted with permission in GPSolo eReport, Volume 10, Number 2, September 2020. © 2020 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association or the Solo, Small Firm and General Practice Division.