Over the last several weeks, our phones have been ringing – a lot. Landlords and tenants want to know what lease obligations they can temporarily forego and what rights they do or do not have, given all that has been wrought by COVID-19, including mandatory closures, suggested closures, social distancing, and the inability to access government offices or courts, to travel, to obtain inventory, supplies, or materials, and, generally, to conduct business and meet responsibilities as contemplated when the governing document was signed.
In the last four weeks, there has been much written about the lease clauses and avenues to pursue that are the most relevant to a technical analysis of the questions posed – the force majeure (a/k/a impossibility of performance) clause; the long-shot condemnation clause; the equitable theories based on impossibility, mutual mistake, or simple fairness; insurance recovery; and bankruptcy.
So what’s happening in the “real world”? Here’s what we are seeing in our practice.
1. Everyone is nervous. Although this anxiety is, in large measure, due to the facts that we know, it is also clearly driven in large measure by having to plan for the unknown – how bad, how long, what does the “recovery” look like?
2. Obviously, many businesses have already seen drop-offs – in many instances, precipitous drop-offs – in revenue. These drop-offs, coupled with the fact that even the businesses that are weathering the storm relatively successfully so far are still unsure what the future will bring, have led to a widespread belief that defaults are unfortunate, but zero liquidity is devastating – i.e., cash is king.
3. Many tenants are not paying or are paying only in part, with the only question being whether to communicate with the landlord in advance or to act unilaterally. And, if the tenant does communicate with the landlord in advance, the question becomes whether to dictate what will and won’t be paid or to ask for a deferral or abatement of rent. Essentially, this is a version of the basic debate whether it is better to ask for permission or forgiveness. Our advice always depends on the circumstances of the individual situation, but generally we have advised that advance communication and a consensual solution is the preferred approach.
4. We are generally finding landlords to be realistic in understanding that at least some rent is not going to be paid. Some landlords are providing their tenants information on available public assistance and loan programs, including, of course, the Paycheck Protection Program (PPP). Our experience is that a landlord will treat tenant requests on an individual rather than a systematic basis. We have not experienced a “one solution fits all” landlord mentality. Some landlords are declaring formal defaults, some are not. In either event, the approach is one of working together to forge the best possible solution. We have not seen any waivers of rights by landlords. We have not seen absolute forgiveness of rent.
As mentioned, there does seem to be a general acceptance of the reality that only partial payments, if any at all, will be received in April, with a vague understanding such measures are stop-gap measures. Waivers of penalties and even interest are based on individual negotiations. Since no one knows where this is going or how long it will take to get there, no one has the information required to craft a long-term solution. Instead, the attitude seems to be, “OK here’s how we handle the problem this month, and next month we’ll figure out next month.” (It is possible, of course, if not probable, that landlords will be more aggressive in situations where re-leasing the space for more money is a likely possibility.)
5. When the situation ultimately takes shape and we have a sense of where we are going, we expect there to be the usual panoply of activities:
a. Consensual agreements with some combination of rent abatement, rent deferral, rent repayment with or without interest, and extension or shortening of term.
b. Litigation over various technical issues (e.g., if the force majeure clause carves out the obligation to pay minimum rent and a tenant has a period of rent abatement, does the abatement period run even when the store is not permitted to be open?), either in the context of eviction actions or not.
Practice Tip: Don’t forget that lease amendments – even those made with a pure heart and a sense of civic responsibility – if made without the required consents of third parties might constitute defaults under loan documents, SNDAs, ground leases, management agreements, franchise agreements, etc.
6. We have seen little activity to date in the landlord-mortgagee relationship, although we suspect it is only a matter of time. Perhaps this is because the landlord cash flow situation has not yet had time to flow through to non-payments of mortgages. This situation might change dramatically in even the next 30 days. But some of the issues will be much the same – when and what to communicate, what compromises can be reached, what remedies will be applied, etc. We expect the banks, being banks, to be tough. But we also expect some flexibility; banks do not have use for properly managed real estate that is suffering due to the fallout of COVID-19. We expect more “blend and extend” than we do foreclosure.
Practice Tip: Before pleading your case to a lender, review your partial guaranties, springing guaranties, and “carve outs” – you don’t want to say anything about insolvency or an inability to pay debts or anything else that might inadvertently trigger personal liability.
We believe all of our clients – landlords and tenants and lenders – have valuable insight, and we can benefit from knowing what is happening in the marketplace and from the experience of others. What’s your experience? To the extent your experience is consistent or inconsistent with the above, please let us know by emailing Shepard Federgreen. As we learn things we believe will benefit others by sharing, we will do so (of course, on a no-name basis).
And remember – Gibbons has been continuously engaged in the practice of law for 95 years. There is no cycle through which we have not helped our clients. Whether you need to work through consensual lease amendments or forbearance agreements, work with your lenders and creditors, apply for credit (including through the PPP, as to which our Government & Regulatory Affairs Department has already done extensive review and worked with clients to file many applications), litigate, negotiate with insurers, seek the protection of a bankruptcy, or make a claim in a bankruptcy, we have been there, many times.