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LEASE CHALLENGES DURING THE COVID-19 PANDEMIC – PART 3
Once tenants have taken the necessary steps to prepare, they should contact the landlord or engage an advisor to act as mediator. Tenants should be as transparent as possible about the state of their business and financials in order to succeed in negotiating the best possible outcome. Ideally you can share that there is a “light at the end of the tunnel”. Engaging in this manner mitigates tension in an already stressful situation and facilitate collaboration for both tenant and landlord in achieving a mutually beneficial end.
Insurance coverage may provide tenants with recourse during the pandemic. An insurance carrier can quickly determine grounds for a claim. However, the insurance industry took significant steps to revise policy coverage after the SARS outbreak in 2003, so there may be no coverage for COVID-19.
What should tenants be doing with existing leases or renewals now? Real estate expenses are one of the largest components of cost structure in most companies today. Here are important considerations to help develop a cohesive strategy for cash preservation while maintaining your leased premises:
Review Lease Terms and Conditions
Rent – Identify key rent components and amounts. Is rent NNN or gross? When is the next scheduled escalation and amount?
Lease Expiration Date & Options – When does the lease expire? What is the renewal option notice date? Is there a termination right? Is there a contraction right or “give back” option? What is economic impact of each?
Default – What terms of default exist and what are the landlord’s remedies in the event of a lease default? Is there a right to cure and what is the timeframe? Defaulting on the lease could result in tenants paying late penalties, interest, damages or even eviction.
Guarantees – What entity is liable in the event of default? Tenants should address the length of tenancy and past instances of default, if any.
Security Deposit – Is the landlord holding a cash security deposit? Is there a Letter of Credit? What is the amount? What happens if the Letter of Credit is not extended?
Operating Expenses & Real Estate Taxes – Are these included as part of the gross rent and subject to a base year escalation? Are these passed through to you on a NNN lease? Is it likely there will be an increase during the next true-up? Be sure to obtain the landlord’s true-up statement and all backup detail.
Insurance – What coverages are required of the tenant? Landlord? Seek the advice of your insurance carrier to determine applicability to the COVID-19 pandemic.
Force Majeure – Does an “Act of God” clause reduce or eliminate either party’s performance under the lease? It is important to note Force Majeure clauses differ from lease to lease: they need to be reviewed in detail. Seek the advice of an attorney.
Collaborate with Your Landlord
Scrutinizing leases prior to approaching the landlord for rent relief will enable tenants to devise scenarios to give a landlord options. Tenants and landlords will need to work collaboratively in order achieve a mutually agreeable solution. Landlords are empathetic to tenants’ needs, but they must continue to receive rent and pay their mortgages, while tenants need to conserve cash in order to meet the needs of the business. Landlords are often open to working with tenant’s real estate advisors in order to expedite solutions.
It is always recommended to consult an attorney on legal covenants within the lease. Using the foregoing as guide should allow tenants and landlord to come to reasonable terms during this difficult time.
Beacon Street Realty Advisors is available to assist you. Please call Mitch Jacoby @ 978.476.1223 or connect via LinkedIn to arrange for a confidential discussion about your situation.
Office tenants are asking important questions as to the impact COVID-19 virus is having on leasing office space and paying regular recurring rent.
Following are six frequently asked questions:
If we are sheltering in place and everyone is working from home, do I still need to keep paying rent?
Yes. Rent abates only if there is a fire or other casualty like a storm that results in the space no longer being usable for a period of time because of physical damage to the space. This is known as Force Majeure, a legal term referring to an Act of God that results in some physical damage.
Some office tenants believe that negotiating directly with the landlord will save money since they won’t have to pay a leasing commission to the tenant’s broker. This idea can cost tenants an enormous amount of money over the lease term. How?
Beyond just base rent, landlords are extremely skilled at recovering transaction costs in other areas such as:
- Reduced tenant improvements or base building upgrades
- Lower rent abatement
- Incorrect base year operating expenses and real estate taxes
- Inordinate utility costs with markup
- High security deposits
- Inaccurate pro rata share
- High construction management fees
- Turn-key buildout
What are the “triggers” for creating opportunities with tenant’s leases?