BRIEFINGS
By Tory Goldson
WHAT ’ S THE RISK ?
COVID-19 has fundamentally impacted commercial leasing by changing the basic calculation behind pandemic risk allocation .
After more than a year since the world first learned of COVID-19 , landlords and tenants , as well as their investors , managers , and lenders , are continuing to deal with the ravages of the pandemic on their assets and businesses . In commercial leasing , what began with short-term rent deferrals has given way to rent abatements and term extensions . Temporary shutdowns have led , in some cases , to shuttering , and bankruptcies abound . Now , with summer fast approaching , there is an expectation that vaccine supplies will surge as businesses start leasing new space in earnest again .
How will the pandemic alter commercial leasing from the standpoint of risk allocation ? We are already hearing accusations during lease negotiations that one side or the other is engaging in “ pre-pandemic ” thinking . Leasing policies and forms of owners and occupiers alike are being reviewed and updated as decision-makers consider how best to approach pandemic-related risks — and other risks beyond their control , for that matter — in the future . Obviously , the development of widely available , affordable insurance or governmental safety nets to mitigate epidemic-related risks would impact lease negotiations in the long term , but that remains to be seen and new lease deals are happening now .
Fundamentally , a lease is a long-term agreement where the parties ’ interests are , for the most part , not aligned , so virtually every provision involves a risk allocation . The pandemic has forced the commercial real estate industry to take a deep dive into some of its lease boilerplates . The force majeure clause has been spotlighted during the pandemic . The most common iteration provides for an extension of the time periods for a party to perform its lease obligations if the party ’ s ability to perform is impacted by certain causes beyond its
In new leases , tenants will likely be unwilling to take the risk of pandemicrelated delays . control . The scope of force majeure clauses varies and often has exceptions . In addition , these clauses may do more than delay or suspend performance — they may relieve a party of its obligations where performance is prevented due to causes beyond its control .
From the landlord ’ s perspective , the tenant should be allocated all property ownership risks with respect to its premises during the lease term . Landlords will likely continue to see pandemic-related types of risks as beyond the control of the parties and falling under force majeure clauses . Landlords will argue that these are risks of doing business , not risks of property ownership . Many landlords are updating their lease forms to place the risk of pandemics more directly on tenants . Moving forward , force majeure provisions will expressly include pandemics , illnesses of lesser proportions , governmental orders related to those situations , and other public emergencies — without relieving the tenant from its monetary obligations under the lease during pandemic-related impacts .
In addition , some landlords are broadening the releases and waivers in their lease forms to have tenants waive claims associated with the pandemic , such as those over a tenant ’ s lack of access to its premises , an inability to operate due to pandemic-related governmental orders , and measures taken by the landlord during and in the aftermath of pandemics , such as shutdowns , safety protocols , and reopening restrictions .
From the tenant ’ s perspective , risks should be adjusted on a cost-benefit basis to avoid inequitable allocations and to accord the landlord risks that the tenant views as inseparable from property ownership or as being included in the fixed rent . In new leases , tenants will likely be unwilling to take the risk of pandemic-related delays in the delivery of possession ,
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SPRING 2021