The state and federal governments’ response to the COVID-19 pandemic will provide much needed relief to small businesses here in Maine and across the United States. However, that relief will take time to reach everyone’s bank accounts. In the meantime, owners of commercial and residential real estate will be dealing with the reality that most, if not all, of their tenants will be unable to pay rent.
Since the payment of rent by tenants and a landlord’s ability to make its loan payments (as well as pay for other property costs and expenses) are inextricably linked, landlords face challenging times and some very difficult choices. While not a panacea for the challenges ahead, careful planning and understanding the options available can help ease the burden and stress in these uncertain times.
What options exist for landlords?
There are a number of approaches landlords can take with their tenants.
- Enforce the terms of the lease. Tenants do have a contractual obligation to meet the terms of their lease, but probably without exception tenants who are unable to pay during this pandemic are in that position because of circumstances outside their control. Thus, during these times, this approach may appear draconian. Landlords should consider whether taking this approach may cause long term damage in tenant (and perhaps community) relations. Moreover, because landlord self-help is prohibited under Maine law, and Maine’s district courts are explicitly closed to FED (eviction) proceedings until at least May 1, 2020, it may not be possible to enforce the lease in the short-term.
- Provide deferment options. This appears to be the most common approach landlords will be taking. The deferment can take many forms, from a partial to a full deferment of rent for a period of time. The timing of when the deferred rent is to be paid back will likely be the subject of negotiation, with the most common approach appearing to be having the deferred rent paid back six (6) or so months from the end of the deferment period. The deferred rent is generally paid without penalty or interest, but that is also subject to negotiation. Things to consider when agreeing to a deferment:
- Make sure the lease term extends beyond the deferment period and the date the deferred rent is to be repaid. A lease extension (or exercise of a renewal right) may be required as a condition of a rent deferral.
- Plan ahead for the tenant’s inability to pay the deferred rent at the specified date or structure the repayment over time. One option is to provide that if all or a portion of the deferred rent is not paid when due, the unpaid rent will be amortized over the balance of the lease term at a set interest rate (this requires a follow up notice from the landlord confirming the increased payment amount depending on how much, if any, of the deferred rent is paid). Again, checking on the term of the lease is essential here, as is a realistic understanding of the tenant’s capability to make payments of deferred rent according to the agreed upon schedule.
- If any part of the unpaid deferred rent is amortized, make it clear that if there is a default at a later date, the entire amount of unpaid deferred rent can be included in the claim for damages. Further, be explicit about any other penalties for default that may apply, such as late charges or additional interest, as well as defining the relevant cure period for a default caused by failure to make a deferred rent payment.
- If a landlord determines that securing the tenant long-term is more important than receiving the deferred rent, allowing the tenant to exercise any renewal rights early in exchange for the forgiveness of the deferred rent is an option.
- Provide an abatement of some or all of the rent. This is a very generous offer, and should only be considered if the landlord’s lender agrees to an abatement of loan payments (which does not seem likely to happen, at least at this point in time), or if landlord has no debt to speak of and is willing to forgo rent because it is more important for the landlord to keep the tenant for some reason.
- A written lease amendment is a must. This will seem overwhelming to some, but landlords should consider developing a template to use with their tenants. A template also makes sense in that landlords should try as best they can to treat all tenants similarly, as there will inevitably be talk among the tenants which could make things difficult for a landlord if there is a wide discrepancy in “deals” cut for tenants.
- Landlords should contact their lenders to obtain consent to these lease amendments. Most loan documentation includes an assignment of leases and rents that prohibit a landlord from making substantive amendments to leases without lender’s consent. This is especially important if a landlord is considering an abatement of rent, or forgiveness of deferred rent if tenant exercises a renewal term early in exchange for the forgiveness.
- Consider having the tenant provide a written statement as to how the COVID-19 crisis has affected their ability to pay rent. This might weed out those few tenants that can still pay but are being opportunistic, and landlord’s lender may request similar evidence as part of the lender’s determination as to whether to grant the landlord a loan payment deferral.
- Landlords must be negotiating deferment arrangements with both tenants and their lender at the same time, since one cannot really exist without the other unless the landlord has significant cash reserves.
- Try not to take it personally. As mentioned above, the vast majority of tenants that are having trouble making rent payments are in this situation because of forces beyond their control. Landlords should generally assume that their tenants would prefer to pay the rent if they could. Nonetheless, it can be overwhelming to have tenants knocking down the door asking for “free rent” when the landlord is also facing the same economic crisis, and without any similar accommodations from its lenders.
Each landlord, based on its particular financial situation, may or may not be able to help its tenants at this time. However, one thing that landlords can always do is treat their tenants with respect, and to try and communicate what is possible as clearly, directly, and with as little delay as possible.
You may also want to provide your tenants with information on the various state and federal programs implemented to help them through this crisis. We’ve compiled a number of resources for both businesses and individuals in our COVID-19 Toolkit.