November 29, 2022

Leasing Options to Consider in the Post-COVID Era | PropertyShark

Leasing Options to Consider in the Post-COVID Era

Given that governments have embraced the idea that shutdowns will remain as one of the tools used to combat Covid and pandemics in general, it is ideal for landlords and tenants to explore their options and prepare to negotiate provisions related to these events since the statutes are silent on this matter and courts have held that general force majeure provisions do not apply.

Depending on the leverage of each party involved, the following are some options to consider negotiating into the lease:

  1. Abatement of rent during the period tenant is unable to operate their business due to government-ordered closures and reduce the rent in proportion to reduced operation orders with rent payments to resume upon reopening. This is an ideal option for the tenant and the most difficult to obtain. The landlord will usually protest this. A potential compromise would be to cut the period of time the abatement is available. For example, one could have the abatement expire after 30 to 90 days.
  2. Forbearance of rent until government-ordered closures are lifted.  While still obligated to pay rent, the tenant does not have to pay when the business isn’t generating any income. The tenant will want to negotiate the terms of repayment.  One option is to repay on an amortized basis over the remaining term of the lease.  
  3. Good Guy Guaranty.  This is commonly requested by tenants.  On the condition that the tenant isn’t in default, this guarantee allows a tenant to vacate the space by giving advance notice (usually anywhere between 3 to 6 months) to the landlord of its intent to terminate the lease.  This can be a good option for both parties. A tenant can cut their losses not just for pandemics, but in any situation, including, but not limited to, unprofitable operations. The obvious drawback is that a tenant may have made significant investments into the space and exercising the option would essentially result in a forfeit.  This guarantee can be desirable for the landlord since it is not stuck with a struggling tenant and doesn’t have to go through summary proceedings to recapture the property if rent isn’t being paid.  It will also give the landlord time to look for a replacement tenant while collecting rent.
  4. Request shorter lease terms due to the uncertainty of the pandemic situation.  This is not the most ideal solution since the tenant and in some cases, the landlord can make significant initial investments into the space upon taking possession of the space. Also, if it turns out the space is profitable, the tenant may have to renegotiate an extension of the Lease at a higher base rent. However, for those who don’t have to make such a steep investment from the start, this option may be viable if the others are not available.  This may be a good solution for landlords who can fill the space with less than optimal but pay tenants for a short period of time while riding out unfavorable economic conditions.  
  5. Enter into a license agreement instead of a lease.  Licenses generally tend to favor licensors (landlords) because there are no possessory rights to this space.  Licensors can evict licensees (tenants) at will and recapture the space after providing little notice- usually 30 days.  But, many renters also prefer licenses because they also can terminate the license at will- meaning no long-term obligations.  Some renters may also prefer licenses if licensors make significant investments into the space in terms of custom build-outs for the licensees, which makes it less likely for the licensor to terminate the license.
  6. Rent WeWork-style spaces instead.  These are licenses and essentially operate like hotels.  They are becoming more popular because licensors do not have to make any long-term commitments, and do not have to invest any money into the space since they are fully furnished and wired.
  7. Typically leases require continuous operations during customary hours.  “Go dark” provisions allow a tenant to cease operations in its space while the tenant continues to pay rent. Even if they can’t avoid or postpone paying rent, reducing operating expenses during pandemics can be a valuable strategy.  This provision is usually beneficial for larger franchise businesses that can afford to pay the rent but not operate. An alternative to this is to go “Dim,” that is to reduce operating hours. This can also help reduce expenses to keep businesses afloat during pandemics.
  8. The last thing to consider is an automatic extension of the lease term for the period of forced government closures so that the Tenant can fully realize their initial investment in the space.

These are just a few ideas. There are other options available. It just takes some creativity and a willingness to negotiate.

This article is for informational and entertainment purposes only and is not to be construed as legal advice.

Read the published article at PropertyShark

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John Pak serves as the Real Estate Chair at the Law Offices of Pardalis & Nohavicka. He is a transactional attorney specializing in acquisitions, dispositions, and leasing.  A graduate of Brooklyn Law School, he received his BA in Political Science from New York University.  Prior to joining PN Lawyers, John owned his own private law practice for 15 years and a title company for 6 years.

Taso Pardalis

Taso Pardalis is a founding partner of the Law Offices of Pardalis & Nohavicka, a leading full-service NYC law firm with offices in Manhattan, Queens, and WeWork. Taso may be a well-known attorney with many cases making headlines in major media outlets, but at heart, he is a true entrepreneur that believes in supporting the small business community. His areas of concentration are Intellectual Property, Trademarks, Corporate, Business Law, and Real Estate Law.

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