Of virus and rents: Can commercial lease renegotiation can help float tenants and owners?
The second round of business shutdowns in California and other states because of the coronavirus pandemic is setting the table for more tough discussions between commercial tenants and landlords as both face significant revenue loses. Gov. Gavin Newsom on July 14 ordered that indoor dining close back down and nonessential businesses to stop using their office space, as COVID-19 cases were rising above than state-directed thresholds in dozens of counties, including Marin, Sonoma, Napa and Solano.
A month earlier, Newsom allowed restaurants to reopen indoors under COVID-19 safety precautions.
Depth of the business pain
On restaurants alone, the results of the on-again, off-again shutdowns has been devastating. In the first half of July, the new round of shut-downs across the country lead nearly 100,000 restaurants to cease operating, according to the National Restaurant Association. Rabobank projects that independent restaurants alone will account for nearly 60,000 business failures in the U.S. in the next year
Soon after the state’s first shelter-in-place closed restaurant dining rooms, theaters, malls and nonessential shops and offices in North Bay counties and across California four months ago, talks began between tenants and property owners. Tenants faced having to pay landlords for rent and other expenses at the beginning of April, and landlords faced payments to property tax authorities on April 10.
While California and counties have enacted protections for renters to not be evicted for nonpayment during the governor’s declared coronavirus emergency, first issued March 4, such moratoriums for commercial tenants have varied.
Marin County let its commercial eviction ban lapse in June, but state courts continue not allow court summons for unlawful detainer — failure to pay rent — until 90 days after the order is lifted.
However, property owners can still sue tenants for monetary damages from nonpayment, but that’s a risky undertaking, with so many businesses teetering on insolvency right now, according to Jeff Lerman, whose San Rafael-based Lerman Law Partners represents commercial tenants and landlords.
“Even though the restrictions on evicting the tenant have taken away an important arrow in the quiver of landlords, they do still have the leverage of being able to get the tenants’ attention by saying, ‘Look, we either have to sit down and figure this out, for your failure to respond leaves me no choice, or I'm going to have to go ahead and sue you for the rent.”
Can your lease ‘force majeure’ the issue?
Real estate attorneys have been closely examining lease language in the past four months to find out whether the documents have a force majeure clause, which allows for changing the obligations for performance based on an “act of God” like an earthquake. While form leases can include such clauses, they may not have “magic language” that can apply in a situation like the COVID-19 shutdowns, Lerman said.
“The kind of language that will improve your argument that you’re not in breach for not paying rent is to expand the force majeure to cover an epidemic or quarantine, a disruption of the labor force, national emergency, act/order/requirement of a government authority or ‘other similar causes beyond the control of both parties,’” he said.
After the public safety power shut-offs by Pacific Gas & Electric Co. that left businesses darkened in much of the North Bay for days last fall, leases up for renewal are being reevaluated to make sure force majeure clauses are properly worded to account for acts by a utility, according to Lerman.
Cost of evicting a nonpaying tenant
Problem is, kicking out a tenant for nonpayment would leave the space vacant, with costly prospects for filing it again, according to Tom Laugero, a partner of commercial real estate brokerage Keegan & Coppin Co. Inc., who specializes in retail properties.
“What are you going to do? You're going to evict somebody for not paying the rent? Because you got nobody to step into there to take the space,” Laugero said. “So if you throw them out, you're looking at six months or a year to retenant and the cost of (setting up) a new operator and (agent) commissions and everything else. If it’s salvageable, you try to salvage your tenancy.”
A common approach by owners of North Bay retail properties, depending on whether the tenants are sole proprietorships, franchisees or other types of businesses has been 30-, 60- or 90-day deferral or abatement of full or partial rent payments, commonly pushing those payments into 2021 and amortizing them interest-free over 12 months, according to Laugero.