Editor’s Note: The content from the following article is based on a recent Real Estate Matters podcast with David Skinner, a long time member of ACRE’s Leadership Council. David is a Birmingham attorney with a statewide practice where he exclusively represents commercial landowners on various aspects of real property including leasing, financing, succession planning, individual rights, land-use and environmental issues.
The COVID-19 pandemic has affected many aspects of real estate, especially rent obligations for tenants leasing commercial real estate. Tenants and landlords alike began thinking of the April 1 rent payments in early to mid-March when the likelihood of an economic slowdown became more apparent due to quarantine measures. Of course all leases are different, with some having rent due on the 1st, while others having it due by the 5th or the 10th, depending on the terms.
Because of the economic slowdown, some tenants are asking for rent concessions due to the shutdown, and that raises a few questions. An ideal solution will work out best for both landlord and tenant. Also, most landlords do not want a default situation and would rather keep the tenant in place.
By and large, most tenants are paying something towards their April rent. Some have paid in full, while others have made partial payments, with some not paying at all. However, some tenants might have their April rent due later in the month. Some tenants have requested a concession or rent relief. In some cases, the tenant begins the process by asking for a concession in very general terms, which creates some issues for the landlord as there is much to consider before agreeing to a concession.
Rent concessions generally take one of the following three forms. A deferral is a delay of the rent. The tenant does not have to pay now, but will have to pay at a time specified in the future.
Abatement is when the month’s rent is forgiven once the end of the lease is reached.
Forgiveness is the entire relief of the rent obligation for a specific month.
Discussions must be detailed, especially with the language, to make sure that what the tenant is asking for and landlord agreeing to are the same thing. A tenant might ask for forgiveness when they only really needed a deferral, and get a no in response. A request for a deferral, on the other hand, might have been accepted by the landlord.
Many landlords are deferring the month of April, asking that April rent be paid in 12 equal monthly payments from August 1, 2020 through July 1, 2021 as an addition to the regular monthly rent payment.
It is important to put yourself in the other person’s shoes. The landlord, for example, might be in a similar situation if they have a mortgage payment due.
Mr. Skinner said he was surprised to see a number of tenants requesting a concession without providing any supporting financial documentation to show they are losing money. In one example, a company demanded three months of free rent. A look at the financial documents, however, showed they had very good March revenues in spite of the pandemic, so a concession was really not necessary in this situation.
Mr. Skinner has advised many landlords to not agree to rent relief until they know what the tenant’s exact needs are, which will be based on a review of financial information. It is important for the landlord to know why they are giving the concession. One important factor is business interruption insurance, which many tenants have and would reimburse them for lost profits while also paying their April rent. If a landlord agrees to forgive rent, then the tenant suffers no loss, and jeopardizes their insurance claim. Many landlords know if their tenant has this type of insurance because it’s in the lease details. So a tenant in this situation has to provide proof that their insurance claim has been denied before asking for a concession from the landlord.
Another factor is the payroll protection act. A small business, for example, might be able to qualify for funds through this program to cover both payroll and operating expenses. In some instances this money might not have to be paid back, and using the program can possibly create a better result than a deferment, where the tenant is still obligated to pay the rent but at a later date. Landlords do not need to be agreeing to concessions if the tenant has not applied for relief through this program.
Force majure clauses are included in many leases but do not necessarily relieve rent obligations. It is important to look at the clause closely to see if it excuses financial performances. If the clause does apply, it will most likely take the form of a deferrance, not outright forgiveness. Many force majure clauses also do not amortize the rent over 12 months as in the earlier example. It delays the payment until the condition expires, and then all rent is due.
Mr. Skinner closed the podcast by stressing the importance of communication between landlord and tenant so the best solution can be reached. The above are just a few examples from the podcast, and you can listen to the entire show here.