Many businesses have suffered under the current COVID-19 crisis, including commercial landlords, who are experiencing the loss of income, as well as numerous requests for rent reduction or abatement from their tenants. While is it wise for the parties to work together at this time, landlords have many factors to consider,such as paying contractors servicing the leased property, and the landlord’s ability to service any loans on the property.
While there is no magic pill for all commercial leases, the obvious solutions are, full or partial rent abatement, rent deferral or a combination of both.
Full or Partial Rent Abatement – The parties may agree upon a temporary rent abatement, which may range anywhere from a full abatement of all rent and obligations due under the lease, to a partial abatement of base rent only. While the landlord will need to ensure that its basic costs are covered, and push for a fixed end date, the tenant should push for as much discretion as possible to determine when the temporary rent abatement period should end; such as, for example, rent resumes upon re-opening of tenant’s business., Another, more simplistic form of abatement would be to revisit the temporary rent abatement on a monthly basis.
Rent Deferral – Rather than providing for rent abatement, the parties may agree simply to defer rent, by providing the tenant with a full or temporary rent deferral for a period of time, with the tenant being responsible for repaying any deferred amounts later. For example, under rent deferral, the tenant may be required to pay back the deferred rent in equal installments in addition to the normal rent obligations as they come due each month. Other solutions, such as a combination of rent abatement and deferral and/or requiring the tenant to provide additional security, and a corporate or personal guaranty for smaller businesses.
Finally, there is always lease termination, but that generally favors the tenant more than the landlord. Again, it is important to remember that each situation is different. While North Carolina law is available to interpret the provisions of any particular lease, the landlord should consult with his or her attorney to determine which solution fits best.
While the Landlord Tenant Act, codified at Chapter 42 of the North Carolina General Statutes, covers residential leases, there is no equivalent for commercial leases. Rather, parties to a commercial lease are deemed to be sophisticated persons or entities that are able to negotiate with one another at arms-length. Thus, by and large, the lease between them comprises the entirety of the deal. Additionally, the concepts of the North Carolina common law of contracts generally apply to these leases.
Tenants seeking rent deferral or reduction should not assume that landlords are required to accommodate their requests, and they should be prepared to explain why it is needed and what measures they have taken to address their difficulties. On the other hand, landlords need to consider the long-term ramifications of the COVID-19 crisis, and their response to it, on their tenants. If needed, they should reach out to their lenders to see what options may be available for a comprehensive solution. Regardless, it always “best practice” to reduce any agreement to modify a lease to a signed memorandum drafted to memorialize the parties’ intentions and to avoid any future confusion. Overall, it is important to remember that the success of the landlords and the tenants are not separate but joined. Regardless, the legal issues created by the current crisis are unique and should involve consultation with an attorney.
Please contact us with any questions. The current COVID-19 crisis has created a lot of confusion, but together we can overcome this troubling time.
Author: Ted F. Mitchell, Attorney The McIntosh Law Firm, P.C.