As widespread social distancing measures and government-mandated shut-down orders due to COVID-19 are enforced, tenants and landlords face mounting pressure to meet their respective lease agreement obligations.
For many tenants, lease obligations are a significant portion of overall business expenses and the obligation to pay rent during a period of business interruption can put a tenant’s business in jeopardy. In recognition of the risk to tenants and the related longer-term risk to themselves, landlords may enter into rent deferment agreements with vulnerable tenants. The appropriateness of the rent deferment agreement and the terms contained therein varies on a tenant- by-tenant basis. The value of offering a tenant a rent deferment agreement is also contingent on the prospects of retaining a group of tenants and the prospects of reletting any premises made vacant by a tenant whose business fails during the period of business interruption.
A rent deferment agreement allows a tenant to defer rent payment for a specified period of time. Typically the agreement defers only a portion of rent and the tenant must continue to make minimum payments. At the end of the specified time, the tenant must resume paying rent in addition to paying the deferred rent in periodic installments. It is important for the tenant to recognize that rent deferral requires payment at a later date; it does not forgive rent payment, unless such abatement is agreed to by the landlord.
When a rent deferment agreement takes effect, the landlord temporarily forebears exercise of termination rights so long as the tenant continues to pay the required portion of rent and performs its other obligations under the lease. As discussed, it is in the landlord’s interest to retain tenants who demonstrate commitment and foreseeable ability to resume normal payment schedules.
What should landlords consider when evaluating the appropriateness of rent deferment agreements?
Salient facts about the tenant include:
- Financial position and ability to pay regardless of operations
- Short- and long-term ability to resume full-capacity operations
- Tenant’s secondary obligations and operating costs
- Availability of government assistance, tax relief programs and private insurance as the tenant’s initial sources of rent relief
Salient facts about the landlord include:
- Restrictions in the landlord’s mortgage, partnership or management agreement that would prevent the landlord from freely consenting to lease amendments
- Prospects for acceptable substitute tenants, should the landlord terminate the lease
- Landlord-tenant history of co-operation in previous lease amendments or extenuating circumstances
Rent deferment agreements should include provisions specifying the portion of the rent that will be deferred, the deferment period, interest charges and the payment period. Landlords should protect their own interests by specifying conditions that result in automatic termination of the agreement, such as bankruptcy, insolvency and termination of the initial lease agreement.
There is room for flexibility in a rent deferment agreement to best suit the long-term requirements of both landlords and tenants. Options that incentivize the landlord’s flexibility are conditions that increase security from a tenant and, in the case of short-term leases, conditions that extend the lease beyond the period specified in the rent deferment agreement. While tenants have no legal right to extract new agreements from landlords, the pressure of COVID-19 as an unprecedented circumstance calls for co-operative landlord-tenant efforts.
This discussion of issues and anticipation of legal outcomes does not constitute legal opinion. For legal advice particular to your business, please contact MLT Aikins LLP. Our team is available to assist you.