Photo by 10 ’ 000 Hours construction , and the opening of their businesses in the leased space .
Tenants will argue that they should not bear 100 percent of the risk of future pandemics . They will not want to pay rent when they are unable to fully utilize their premises . Many tenants will propose lease provisions where pandemic-related interruptions in their use of the premises trigger rent abatement and , if interruptions are prolonged , allow the tenant to terminate the lease . Other tenants may address pandemic risks in a less direct way . They may seek greater flexibility in lease terms — shorter terms with more extension options or longer terms but with early termination options .
Generally speaking , the underpinning of risk allocations in a negotiated commercial lease is to create a fair allocation of anticipated risks among the parties . Casualty , condemnation , and service interruption provisions in a typical lease address the allocation of risks beyond the parties ’ control in a more balanced way than the “ all or none ” approach of the force majeure clause . Some landlords and tenants , especially in the sectors hardest hit by the pandemic , are negotiating to share pandemic-related risks .
Negotiations center on the scope of risks , as well how those risks will be shared . For example , the parties may agree to limit shared risks to governmentally imposed restrictions due to pandemics or public emergencies . On the allocation issue , the parties may agree that , in the case of a restaurant as an example , a required closure will afford a 50-percent rent abatement while density impacts might result in proportionally less abatement ( measured either by the reduction in permitted density for in-person dining or by the impact of the restriction on the tenant ’ s revenues or some combination of factors ). Some parties are being more creative — or tortured , depending on your viewpoint — with the tenant taking closure risk for the first 30 days of impact during any given year ( no fixed rent abatement ), the landlord taking the next 30 days ( 100 percent fixed rent abatement ), and the parties sharing
Some landlords may decide to formalize a rent deferral right in leases that allow tenants an option to take rent deferral under certain circumstances . that risk ( 50 percent fixed rent abatement ) if closures run longer than 60 days during any year .
Some landlords may decide to formalize a rent deferral right in leases that allow tenants an option to take rent deferral under certain circumstances with the landlord ’ s reasonable consent and after various submissions and required metrics are met , with preset repayment terms . Similarly , landlords also might consider having an early force majeure extension option with preset rent abatement that can be taken immediately if the tenant meets certain requirements . Having provisions that provide a roadmap for the type of abatement and deferral arrangements seen over the last year have the added advantage of creating more certainty among landlords and tenants . They can also help landlords and their lenders and servicers navigate how best to handle such situations in the future .
What is clear — it will be difficult for parties to come to any kind of industrywide consensus on the best way to address pandemic risk in a commercial lease in the near term . There are , and will be , lease negotiations over this risk allocation and , as with any other issue , its resolution will depend on the parties ’ leverage and what each side sees in the long-term economic and operational impact of the pandemic and the likelihood of facing similar challenges again . As parties debate whether and how to share future pandemic-related risks in commercial leases , everyone at the table will share the hope that we never see another pandemic like COVID-19 in our lifetimes .
Tory Goldson
Partner at Bryan Cave Leighton Paisner ( This article provides a general summary and is for information / educational purposes only . It is not intended to be comprehensive , nor does it constitute legal advice . Specific legal advice should always be sought before taking or refraining from taking any action . The opinions of the author do not necessarily reflect those of Bryan Cave Leighton Paisner LLP or its members .)
CIREMAGAZINE . COM COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE 17