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Lease Issues During the Covid-19 Crisis

March 31, 2020 - By: John R. Blake, Jr. and Michael J. Radin
April 1st (and the first day of the next several months) will bring a new kind of anxiety for landlords and tenants, as the gravity of the current events surrounding the ongoing coronavirus crisis plays out. Inevitably, the economic fallout from the pandemic will make it impossible for many tenants to pay their normal rent, or even a portion of the amount due. Until the funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) arrives, any changes to the ordinary payments will quickly flow upstream to landlords, their lenders and their investors. Moving forward, here are some critical things landlords and tenants should do now to avoid surprises.
  • CARES Act. The recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) may provide a lifeline for both commercial landlord and tenants impacted by the current coronavirus emergency. Perhaps most significant, the Paycheck Protection Program (“PPP”) allows businesses, many of whom are commercial tenants, to seek forgivable loans of up to 2.5 times their average monthly payroll (based on their payroll over the prior 12 months) that may be used to pay salaries (up to $100,000), rent, utility costs and mortgage interest. SBA-approved lenders will process the applications with minimal underwriting. Loans will be forgiven in whole or in part based any one of three factors related to (1) limited reductions in salaries, (2) limited reductions in the number of employees, or (3) employee re-hiring and wage restoration by June 30. Any loans (or portions of loans) that are not forgiven under one these three tests may be repaid over a ten year period with interest not greater than 4%, For more information go to Other available relief programs under the CARES Act include SBA Express Loans and economic injury disaster loans (“EDIL”), both administered by the SBA. Finally, borrowers (likely only tenants) that received SBA Section 7(a) loans may be entitled to subsidies with respect to those loans. Landlords facing reduced rent payments from tenants (and otherwise impacted by the current crisis) may be eligible to seek PPP loans using the same relaxed underwriting standards (note that there are other benefits for commercial landlords in the CARES Act that are beyond the scope of this article). For both landlords and tenants, funds received under the PPP may not be used for principal payments on outstanding debt (such as mortgage debt). Critically, some or all of a PPP loan spent on specified expenses during the 8 weeks after the loan is made may be forgiven (based primarily on employee headcount and compensation adjustments; the forgiveness rules are beyond the scope of this article). PPP funds would have to be used by June 30, 2020 so it is important to contact your lender (or find an authorized SBA lender) and submit the application as soon as possible. The forms for the PPP loans have just been released. Click here to access the SBA online resources to access the forms and for more information.
  • Review the lease: Landlords and tenants may not have revisited the lease since its original signing, which may have occurred years ago. The first step is to review the lease, as the exact terms of the lease is the starting point of any analysis. Look for the “force majeure” (act of God ) clause (if there is one in the lease) to see if the language applies to a government order to close non-essential businesses. If it does, does it expressly excuse the tenant’s obligation to pay rent? Most leases have a clause saying that a tenant’s obligation to pay rent is independent of all other obligations (including the landlord’s) under the lease. Other lease sections to review are casualty clauses to see what type of damage triggers a rent abatement and services that the landlord is obligated to provide but has not.
  • Review Your Insurance. Landlords and tenants should check their insurance policies for rent interruption (landlord) and business interruption (tenant) coverages. Examine the policies themselves (versus what may be recited on an insurance binder), as the policy language controls. The coverage likely is limited to specific situations and/or events, and there may be notice and waiting periods before any coverage begins. An insurance broker can be helpful in navigating the specific terms of the policy, as brokers are independent whereas insurance agents work for the insurers. A public insurance adjuster who advocates for insureds making claims may be of assistance.
  • Consider Your Lender. Lenders (for both landlord and tenant) should be part of the process of working through current cash flow problems. Mortgage holders will likely have superior rights (even to the landlord) to collect rents if the landlord defaults on its loan (in some cases, even before the landlord defaults). Likewise, a lienholder on the tenant’s assets can bring the tenant’s business to a permanent end by seeking to enforce its lien rights, thereby eliminating any hope of restarting the rent stream when things stabilize. Another point to keep in mind: lenders typically require they be given priority claims to insurance proceeds as part of the security for the loan. So, if an insurance claim gets any traction, landlords and tenants may need to involve their lenders. Should any insurance money be made available it should be used to keep the parties afloat and, hopefully, the lender will make the funds available. In some cases, they may be obligated to do so under the loan documents. Lenders may have resources available and may be able to adjust loan terms temporarily to help their borrowers through the crisis.
  • Communicate. Perhaps the most important step is for the landlord and tenant to have a dialogue with each other and their lenders early. Silence may be taken as a sign of unwillingness or inability to address the problems and could prompt dramatic action by a party. If the parties are engaged with one another and express a willingness to work through the present crisis, the chances are better that a mutually agreeable solution can salvage the business relationships.
Everyone is in a new environment that remains both very challenging and fluid.

This alert was prepared by John Blake, Esq. and Michael Radin, Esq. who can, along with any of us at the firm, assist.

This website presents general information and is not intended to provide legal advice and it should not be considered or relied upon as such. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as lawyer advertising.