This is the first in a series of blog posts covering the topic of commercial leasing during these uncertain times. Throughout the summer, this series will explore a number of commercial leasing related questions raised by both commercial landlords and commercial tenants.

The COVID-19 pandemic has impacted businesses across all industries in disparate but equally challenging ways. Some businesses have faced the challenge of figuring out how to transition their employees to remote work, while others have had to decrease the size and scale of their in-person operations in an attempt to safeguard their employees and customers. Other businesses have been required to shut their doors completely for extended periods of time. These shifts in business-as-usual have left both commercial landlords and commercial tenants with questions about how best to sustain their businesses and maintain long-term financial stability. As commercial landlords and tenants consider cost-saving and sustainability-focused measures, rent deferrals and rent abatements have been and continue to be explored as possible solutions.

The following aims to describe some options landlords and tenants can pursue to remedy defaults in the payment of rent due to a loss of income during the global pandemic and periods of civil unrest. We look at the difference between rent abatement and rent deferral, explain how to pursue one of these options and provide creative solutions to commercial rent related issues.

Common Questions Related to Rent Abatement and Rent Deferral

1.  What is the difference between rent abatement and rent deferral?

When rent is abated under a lease, the tenant is not obligated to pay and the landlord is foregoing the right to receive the rent or a portion of the rent for a specified period of time. Once the period of abatement ends, the tenant resumes payment of rent pursuant to the terms of the lease. While rent is typically not due during an abatement period and not tacked on to the end of a lease term as a deferral may be, there may be times in which abated rent is required to be repaid by the tenant. For example, the lease could require repayment upon a breach of the lease by the tenant. On the other hand, when rent is deferred for a period of time, the payment of rent remains an obligation of the tenant payable by the tenant at a future date. While rent abatement is preferable to a tenant and rent deferral is preferable to a landlord, there are creative solutions that can be incorporated into leases to make rent abatement and/or rent deferral work for both landlords and tenants which we discuss below.

2.  How does a tenant or landlord go about seeking one of these options?

Negotiations related to rent abatement and rent deferral can take a number of different forms. Landlords and their tenants can work with each other directly or can involve their real estate brokers or attorneys an order to work through potential rent related negotiations.

Regardless of the specific terms agreed to by a landlord and tenant, it is important to work with your real estate attorney to memorialize newly negotiated rent terms in an amendment to the original lease rather than relying on informal email exchanges or phone calls. Proper documentation is important to ensure the terms related to the agreed upon rent abatement or deferral are enforceable and are consistent with the lease and any previous lease amendments.

3.  What are some creative solutions to commercial rent related issues?

There is no one solution that works for all tenants or for all landlords. However, rent abatements and rent deferrals are some of the options being pursued by tenants and landlords. So how do we make one of these works when tenants prefer abatements and landlords prefer deferrals? First, let’s look at rent abatement. A landlord may be open to a period of rent abatement with some additional benefits for the landlord included. One possibility would be to allow for an abatement with the current term of the lease extended for a period consistent with the period of the abatement which may or may not be at a higher rental rate. Another option may include an early exercise of a renewal option in exchange for rent abatement. This could be beneficial to both parties. If these options aren’t feasible, are there other terms of the lease that could be negotiated in exchange for the rent abatement? These other negotiated terms could be either monetary or non-monetary.

Next, let’s take a look at rent deferrals. A deferral of rent could give a tenant the time that the tenant needs to increase its production and alter its business to be successful in the new normal. However, rent deferrals can be scary for a tenant that is not sure they will have the money to pay the deferred rent when it becomes due. There are multiple ways deferred rent can be structured to help alleviate some concerns. Deferred rent could be paid in multiple payments over an extended period of time or it could be paid in a lump sum at the end of the lease. Another option would be to tie repayment periods to certain financial metrics. Landlords and tenants can also look at whether there are things that can be done to help with tenant’s success moving forward to help ensure deferred rent will be able to be paid when it comes due. Are there improvements or modifications to common areas that are needed in order for the tenant to reopen or increase business safely?

While rent abatement or rent deferral may provide needed relief now, both parties need to carefully evaluate and consider whether the relief being negotiated is going to work for the parties in the long term. A landlord will need to consider the tenant’s financial performance (including projected performance), evaluate long term risk of future default, comply with any lender obligations or restrictions with respect to modifications of lease terms, and evaluate their own cash flow. A tenant will need to carefully consider any long-term impacts COVID-19 and the civil unrest will have on its business operations and financial performance, whether any negotiated relief now is going to have long term negative impacts in the future and, if so, what can be done to mitigate such impacts.

Coming Up Next

Our next post in this series will address improvements to premises and common areas in light of recommendations for employee and customer/client social distancing.