COVID-19 has turned the world on its head and businesses have been forced to adjust their strategies and adapt to the current economic climate.
Commercial lease agreements can be a significant financial burden for businesses that are unable to operate as usual and make rent. As a landlord, this may put you in a precarious position as you decide how to show compassion for struggling businesses while staying afloat.
A commercial lease agreement is an important tool in navigating these unorthodox times and protecting your business interest.
The Importance Of A Lease Agreement
A lease agreement is an important document for several reasons. Not only does it hold both landlord and tenant accountable for a specified payment plan and maintenance schedule, but it also protects both parties against bad business practice.
It’s important to hire the expertise of a business lawyer to help draw up a lease agreement to make sure that all of the correct boxes are checked and that your document is thorough and legal.
A commercial lease agreement will stipulate the rights and obligations of both parties and ensure that the rights of both signatories are protected. This is particularly relevant during COVID-19 and its impact on business.
How COVID-19 Impacts Lease Agreements
COVID-19 has introduced an increased number of requests for payment deferments, abatements, and waivers. As commercial bodies are struggling with the effects of the pandemic, cash flow has become a serious problem.
As a landlord, it’s important to remain proactive as a manner of protecting both your tenants as well as your enterprise. With this in mind, there are a few provisions to consider including in your agreement.
A force majeure refers to unforeseeable circumstances that prevent a person from upholding the conditions of a contract. In the instance of COVID-19 as a global pandemic, the force majeure clause can relax obligations.
If the wording of the force majeure clause doesn’t stipulate what would constitute an unforeseeable circumstance, then the common law principle of ‘supervening impossibility of performance’ would apply.
A covenant, which is a pledge to do (or refrain from doing) something, is often included in commercial lease agreements. These covenants are particularly common in retail lease agreements.
With many businesses unable to operate due to restrictions, upholding these obligations has become increasingly difficult. The contractual covenant means that the tenant takes all the risk. Often times, these covenants are negotiated along with a “go dark” clause which provides tenants with flexibility.
All commercial leases give landlords permission to evict their tenants after failure to pay rent. However, it’s important to be very careful when pursuing this option. During COVID-19, government restrictions will remain in place, at varying levels, for the unforeseeable future. This could make finding a replacement tenant quite challenging.
An alternative to eviction is to grant tenants certain concessions that will allow for a gradual financial recovery. This could be a temporary rent reduction, a temporary abatement or deferral in paying rent.
Business Interruption Insurance
It’s not unusual for commercial lease agreements to include a business interruption insurance as a requirement. This insurance can subsidize tenant income and operating expenses – including rent.
One way to be proactive as a landlord is to review your commercial lease agreement and make sure that a requirement that the tenant carries business interruption insurance is included.
Final Thoughts On Commercial Leases During Difficult Times
Walking the fine line between “we’re all in this together” and “business is business” can be a precarious journey. At the end of the day, the pandemic has impacted businesses on a global scale, and the chances of emerging strong depend largely on making wise decisions and adopting a proactive approach.
As a landlord, you can review your lease agreement with the help of an experienced lawyer to make sure that both you and your tenant are best protected. For legal services that you can count on, call us at (954) 796-9600.