Given recent business closures ordered by local and state governments, commercial landlords face enormous uncertainty regarding lease and mortgage debt obligations.
Practically every commercial lease has a provision – often referred to as a force majeure or “Act of God” clause – that deals with unforeseeable situations that could affect either party’s ability to meet its obligations. However, credit agreements are a different animal and, absent the lender’s consent, you may well find yourself contractually bound to make regular P&I payments to your lender, while your tenants cease paying rent (whether justified or not).
Following is a brief listing of some of the primary issues facing commercial landlords:
- If your tenants attempt to invoke the force majeure clause in their leases, the lease may require that they provide notice to you the landlord first. In any event, rent obligations are often not covered under a lease’s force majeure clause, because other provisions in the lease require rent payment despite any other provision that would otherwise excuse it. Nevertheless, you have the practical issue of tenants who literally cannot operate their businesses, so they have no source of funds to pay the rent.
- You may wish to seek a payment holiday/deferral or other relief from your mortgage lender. However, you must be extra careful in doing so, especially with CMBS loans, where the loan servicer has much less discretion than a portfolio lender:
- Contact your loan officer and ask whether your lender has put in place yet any policies for short term relief for borrowers; but, please heed our advice below before asking for any relief.
- Ensure your lawyers have final, executed versions of the note, mortgage and all related loan documents, so you and they can determine both what constitutes an “Event of Default” and what payment grace periods or other short term remedies might be available.
- Be especially careful if your loan is non-recourse, but with a “bad-boy” guaranty from one or more of the borrower’s principals. Some acts that would otherwise be considered reasonable efforts to preserve liquidity might inadvertently trigger liability under such guaranties.
- Most force majeure clauses provide additional time for one party to perform its obligations but do not usually excuse a party from performance. Examples include timing on build-outs and delivery of space as well as compliance with “continuous operation” requirements within the lease.
- While it is unlikely to provide any short-term liquidity, if you have business interruption insurance, you should see if events related to COVID-19 are covered.
Before you engage in any significant deviations from your lease or mortgage debt obligations, please contact one of the members of Taft’s Real Estate Practice, who have teamed up with lawyers from the Bankruptcy and Restructuring Practice to provide guidance in these situations.
For more information on coronavirus-related business interruption insurance, read our Insurance article here.
Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.