Landlords are likely to have a loan secured by the property. Rents are the primary repayment source for the loan, and deferred, reduced, or forgiven rent will impact the landlord’s ability to make its loan payments. The loan documents often contain restrictions on what landlords may grant tenants with respect to lease terms, including rent, early terminations of leases, or other similar actions. Loan documents also often contain financial covenants and the landlord may not be able to meet these covenants if rents collected reduce. It is very important that before granting any tenant requests that the landlord consults with its lender to agree upon the parameters of what the landlord may do. It is very likely that the landlord will have to ask the lender for a corresponding deferral period on loan payments and/or suspension of financial covenant measurement to accommodate these tenant requests.
If a landlord does grant tenants rent relief, the landlord, in consultation with its lender, should carefully consider how to structure rent relief. For example, a landlord should consider whether:
- the term of the lease is extended for the period of rent reduction or forgiveness;
- the amount of reduced or free rent is re-amortized over the remaining lease term after the deferral period;
- free or reduced rent bears interest; and
- if the tenant later defaults whether the free or reduced rent is recoverable by the landlord.
Whatever accommodation is given should be documented in an amendment of the lease signed by the landlord, tenant, and all guarantors of the lease. The landlord should also review the other provisions of the lease which may be implicated by the coronavirus pandemic, such as a force majeure clause, tenants’ access to their leased premises and minimum operating hours, landlord’s responsibility to provide services, and other lease terms that should be addressed in such amendment. Finally, the landlord should consult with its insurance company to see if any coverage exists under the landlord’s insurance policies, such as business interruption insurance.
The Real Estate attorneys at Dvorak Law Group have the knowledge and experience to efficiently assist our commercial real estate clients with leases, including assisting landlords when a tenant defaults on a lease.
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