The COVID-19 pandemic has created widespread change throughout the world, impacting the way we work, travel, shop, and simply interact with one another. Of course, it’s also had massive implications for commercial real estate as tenants struggle to pay rent and landlords, in turn, struggle to pay mortgages.
COVID-19 affects different industries in different ways (for example, the healthcare, biotech, and pharmaceutical markets may be less impacted, while business offices and those in the travel and hospitality industry are certainly feeling the pinch). Regardless of industry, the pandemic has resulted in a new type of landlord-tenant relationship.
Increasing Cooperation
To get through this crisis, there ultimately needs to be some give and take as tenants and landlords work together and negotiate for the benefit of both parties. Many commercial landlords are working with their tenants, getting creative to offer help and support. They are providing various forms of lease restructuring, such as waiving base rent for a few months but asking tenants to pay it back later, as far as a year down the line. Others are applying a tenant’s security deposit to rent due the following month and requiring the tenant to pay it back later.
Tenants expecting immediate relief, however, should understand that many landlords cannot modify payment plans unless their mortgage lender agrees to it. To expedite lender approval of any concessions, landlords may ask tenants to supply proof of their need for rent relief by providing financial information (such as sales figures). Some landlords are also requiring tenants to submit business-interruption insurance claims.
Finally, many landlords are working with their tenants if there is a force majeure clause in place. This lease provision relieves tenants from completing contractual obligations as the result of an “Act of God.” This is typically related to a natural disaster, but some landlords are allowing it to be applied to the coronavirus as well. Read more in our blog, Could Coronavirus Trigger Force Majeure Contract Breaks?
Shared Safety Concerns
When it comes to tenant-landlord relationships, COVID-19 has put both parties playing defense when it comes to COVID-19! This puts them on the same team when it comes to initiating safety protocols. Some of the changes that need to be discussed between tenants and landlords include:
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Installing signage detailing new safety protocols, such as social distancing and mask requirements.
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Installing hand sanitizer stations.
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Hiring new or expanding duties of cleaning crews to disinfect workspaces more frequently
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Redesigning open area spaces such as conference rooms, dining spaces, etc.
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Identifying vendors who can help with a redesign or similar initiatives
Read more about changes many offices may undergo in the future in our blog, Office Space and the New Normal.
Finding Government Support
Another factor changing the landlord-tenant relationship involves the role of government. These entities are stepping in with various initiatives to help cash-strapped tenants and landlords alike. For example, the government recently introduced the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides debt solutions for small businesses through Economic Injury Disaster Loan Emergency Loans and the Paycheck Protection Program.
Of course, when tenants aren’t paying, landlords are unable to meet their own financial obligations. So, lawmakers are trying to figure out how to prevent landlords from defaulting on loans, such as delaying property tax collections, even though many municipalities are already financially strained. The most effective intervention has come from the Federal Reserve, which has purchased nearly $10 billion worth of CMBS (a combination of life insurers, real estate investment trusts, and investors in commercial mortgage-backed securities) and notified banks that they won’t be penalized for making reasonable concessions on loans.
Entering a New Era of the Landlord-Tenant Relationship
Landlord-tenant relationships can last a long time when they’re well-maintained; they can also be very short-lived when one party is not interested in working with the other. The COVID-19 crisis has brought the two parties closer together than ever before, usually to their benefit when working together, and often to their detriment when fighting one another. If landlords and tenants cannot come to some sort of compromise, often one or the other will bring in legal aid, which can get costly.
If you’re unable to afford or maintain your current space and are looking for a way out or a new place to call home, contact the CRE professionals at iOptimize Reality®. We can help you sell or sublease your space, or perform a sale-leaseback, to help you avoid legal battles. Then, we can find you a location that better suits your needs and budget, using our network of 16,400 CRE advisors. Contact us today to talk about your CRE needs, our tenant representation services, and more.
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