COVID-19 has had a huge impact on every industry, and the commercial real estate (CRE) world is no exception. Now, as the country begins to slowly (and safely) re-open for business, many tenants are left wondering what to do with surplus space, how to pay for it, whether to transform it for safety in a post-COVID-19 world, and what to do about space needs in the future.
Of course, coronavirus concerns have landlords on edge as well. This is an unprecedented time for everyone involved in CRE. No one has been through such a widespread pandemic in our lifetime, so many people are confused about what to do next. However, there are some things that landlords should definitely be doing for their tenants in the COVID-19 era. Here’s a look at four landlord duties that they should be performing for their tenants right now.
A Review of Tenant Leases
Landlords should be looking closely at the terms of their leases to help understand their rights and the rights of their tenants. Of course, a landlord’s rights may be limited due to crisis-centered government regulations and social pressure surrounding COVID-19. A review of the lease, with the tenant, should focus on identifying any of the following:
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Business interruption insurance. Often added as part of a property insurance package, this compensates tenants for lost income should a business need to temporarily close down as the result of a natural disaster. It usually covers operating expenses, payroll, taxes, and loan payments. Unfortunately, due to the outbreak of SARS in 2003, many coverage plans exclude losses due to a virus, although it’s still worth checking on.
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Civil authority clauses. Although uncommon, some leases have these built-in to protect landlords and tenants from monetary losses if public authorities bar access to their commercial properties.
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Force majeure. This lease provision relieves tenants from completing contractual obligations as the result of a “superior force,” typically a natural disaster. Is a virus considered a natural disaster? It’s a grey area, which we discuss in more detail in our blog, Could Coronavirus Trigger Force Majeure Contract Breaks?
Offers of Guidance and Support
Your landlords should be reaching out to you and every other one of their tenants to hear some thoughts and plans for the future while offering guidance and support. Property owners should be referring tenants to any government programs that may provide financial assistance, such as the $2.2 trillion CARES Act, which provides solutions for small businesses.
Although borrowing may seem unattractive, an accelerated Small Business Administration lending program offers low rates, minimal underwriting requirements, and huge loan forgiveness potential under the Paycheck Protection Program.
Of course, connecting with all tenants on a one-on-one basis can be time-consuming depending on the number of properties and tenants, so at the very least your landlord should hold some sort of virtual “town hall” meeting, involving guest speakers who may be better suited to answer questions and offer advice.
Flexiblity with Lease Agreements
Even as the country reopens, many businesses will continue to struggle due to rent arrears and capacity restrictions. Your landlord should be willing to negotiate, even getting creative through various forms of lease restructuring and other means of rent relief:
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Rent Deferment. The landlord allows the tenants to repay missed rent in small monthly increments or as a lump sum at the end of the lease once the economy—hopefully—is back to normal.
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Rent Abatement. If a tenant is significantly past due on rent payments, a landlord may agree to forgive a certain amount of the past due rent if the tenant remains current thereafter.
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Temporary Rent Reduction. This provides rent relief for a portion or the remainder of the term left on the lease by reducing the base rent, operating expenses, or both.
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Lease extension. Tenants get a rent abatement for a period of time in exchange for adding the same amount of time to the back end of their lease, extending their stay.
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Application of Security Deposit. The landlord will credit the tenant’s security deposit toward missed rent payments.
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Loan Conversion. Instead of abating past due rent, a landlord may convert past due rent into a loan that is payable over time, while the tenant continues to pay the current rent.
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Subletting. This brings in a new tenant for part of or all of the rented space, reducing or eliminating rent obligations while replacing revenue for the landlord.
Of course, all of this needs to be put into writing and signed by both parties to ensure everyone is on the same page.
Finally, landlords should also be reaching out to their vendors; some may be willing to reduce their rates temporarily in exchange for a longer-term deal, which can provide some short-term financial relief to landlords, who can pass it on to tenants.
Implementation of New Building Safety Plans
Re-opening conditions will vary state-to-state, but no matter when or how it happens, one thing is for certain: safety protocols must be put into place. Landlord duties include informing tenants of what plans they’re making to help ensure the safety of employees, consumers, and guests. Some of the changes they should be considering or implementing for building safety include:
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Installing signage informing everyone of new safety protocols (social distancing requirements in common areas and elevators, mask requirements, etc.)
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Installing hand sanitizer stations
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Onboarding new or expanded 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
Everything should be put in writing, with responsibilities that fall upon tenants clearly defined to avoid conflict down the road. Read more about changes many offices may undergo in the future in our blog, Office Space and the New Normal.
Need Tenant Representation? Contact iOptimize Realty!
As every other television commercial continues to remind us, we live in uncertain times. No one knows for sure when the first wave will end, if a second wave will begin, or if a vaccine may just relegate COVID-19 to the history books. So while landlords should be making plans and offering tenant support, it’s unlikely that they’ll have specifics beyond a three or six-month horizon.
If you feel you’re not getting the support you need from a landlord, or are looking to unload surplus space in order to find a new, more economical space, contact the professionals at iOptimize Realty. We will work with you, reviewing your situation and helping you devise a plan to move forward that makes sense for you.
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