By now we all know a business owner financially impacted by the state and local executive orders designed to slow the spread of COVID-19 and “flatten the curve.” Relief under the CARES Act should be rolling out soon (see our recent blog entry “HOW IS YOUR HOUSEHOLD OR SMALL BUSINESS POSITIONING ITSELF TO BEST TAKE ADVANTAGE OF THE CARES ACT STIMULUS?”). But what if you’re a landlord with a tenant that is not eligible for relief? What if you’re a tenant and have to prioritize other expenses over rent just to keep operating?
The CARES Act provides for a temporary moratorium on eviction from federally-backed housing. There’s an emerging patchwork quilt of relief for residential tenants at the state and local level across the country (though few actually relieve the obligation to pay rent). But there has been very little guidance for the commercial landlord or relief for small-business tenant at any level. This vacuum of direction makes it all the more important that landlords and tenants begin communicating immediately to determine how to best move forward under this temporary, but serious new paradigm. To facilitate that discussion, here are three options:
Abatement is the forgiveness of rent for a set period. It allows the tenant to continue operating without having to worry about rent. It may be that the landlord values the relationship with a long-term tenant, has financed a build-out unique to the current tenant, or wishes to help a newly established tenant. Whatever the reason for an abatement of rent, the agreement must be in writing, signed by both parties, and consider the following issues:
Is the abatement full or partial?
The tenant may need, and the landlord may be agreeable to a full abatement. Or, the landlord may not be able to afford a full abatement of rent while the tenant can afford a portion, but not full rent. All or a portion can be abated based on the parties’ agreement. Whatever agreement is reached should be explicitly stated in the agreement.
What is the duration?
Not even medical professionals know when we’ll be “back to normal.” That level of uncertainty makes it impossible for the tenant to determine how long its need for rent relief will last. It also makes it impossible for the landlord to determine how long it will be able to abate rent. In this circumstance, it may be most agreeable for both parties that the abatement agreement be revisited monthly. If so, it is vital that the parties renew the agreement each month in writing and advisable that it be made clear that no duty to renew the agreement exists.
At its essence, an abatement agreement is a contract. It is best for the parties to have it drafted and reviewed by their attorneys to make sure it fits their fact-specific circumstances. While finances may be tight, it is almost always the case that it is less expensive to have a document drafted or reviewed than litigated and enforced. Some additional considerations are survival of the underlying lease terms not modified by the abatement agreement, whether the landlord should be entitled to financial statements to support the tenant’s hardship, and whether any criteria for abatement, either partial or full, should be set. Of course, this list is non-exhaustive which is why an attorney knowledgeable about the situation should be consulted.
Unlike in the case of an abatement, where the landlord and tenant agree on a deferral, rent is not forgiven. Instead, the landlord agrees that rent need not be paid during the term of the deferral, but that any unpaid rent will be paid according to the agreed upon terms. The same issues discussed in the context of an abatement agreement should be considered when negotiating an agreement for rent deferral. Furthermore, the landlord and tenant must agree on how the deferred rent will be paid, e.g. by increased monthly rent for the duration of the lease, lump sum at renewal/termination, etc. The repayment term must be included in the agreement and should never be left to “we’ll figure it out later.”
A force majeure clause lets a party to a contract off the hook if performance is made impossible by an unexpected, external event. Natural disasters and human events like terrorist attacks, political unrest, and labor strikes often qualify. If included in the lease agreement, a force majeure clause may allow cancellation of the lease. Does the COVID-19 pandemic count? The answer is a resounding “maybe,” at least in Michigan. Michigan courts do not recognize common law force majeure cancellation rights. That means if it’s not in the lease agreements, there’s no right to cancel. Even where it is in the contract, courts limit application to the events contemplated by the applicable clause. So, at least in Michigan, a party may have a right to cancel the lease if the clause specifies impossibility caused by an epidemic or is otherwise drafted broadly.
No matter what resolutions are on the table, it is imperative that landlords and tenants communicate during this time of uncertainty. While there are myriad options, it is true, almost without exception, that if the parties can communicate, try to understand each other’s position, and reach a compromise, everybody will be better off in the long run.
Whether you are a landlord or tenant, we’re here with the legal answers you need.