March 23, 2020
In a very short span of time, the Coronavirus has both temporarily and likely in some ways permanently changed the way we work and live. Most companies and businesses are in panic mode, while employees and consumers are in quarantine. Many businesses are temporarily shut down, with little to no means for revenue. In many cases, companies do not have enough cash on hand to weather a multi-month shut down. RCR has fielded many questions regarding ability to pay rent. Should you find your company in this situation, below are some ideas that we have been discussing with colleagues around the world, attorneys, and other advisors. As this situation continues to unfold, know that decisions made by the Federal Government in the coming days and weeks are subject to alter a Tenant’s potential approach and requests to a Landlord. As always, you should contact your advisors to discuss your own individual circumstances.
- Lease Review: Step one is to review your lease in detail, including pertinent sections like the Force Majeure clause. According to Ward and Smith, “Black’s Law Dictionary defines force majeure as an event or effect that can be neither anticipated nor controlled…It goes on to define force majeure clauses as contractual provisions that address contract performance if such performance becomes impossible or impracticable due to events that could not have been foreseen.” In the case of rent abatement or deferral, we have been advised by multiple legal colleagues that it is unlikely the Force Majeure clause will come into effect; however, every case is specific and individual in nature, and dependent on the terms of the specific lease. Some instances where this clause is likely to have influence could include delivery and construction timelines, occupancy requirements, continuous operation requirements, business hours, exclusivity clauses, and holdover.
- Communication: According to the National Law Review, “(d)uring this trying time, the key will be communication. Landlords would be wise to work with tenants to come up with creative solutions by agreement that would allow tenants to maintain operations and landlord to maintain compliance with its loan and other obligations.” Prior to opening a dialogue, consult with your various advisors, including legal. If circumstances are dire, it is typically best to communicate in writing. Some items we have been advised to include in those requests are to (1) outline and timeline the individual situation with your business; (2) make a specific request; (3) provide detailed plans; (4) outline the avenues your company has already pursued, for example SBA relief, product shifts, furlough, layoffs, etc. (your landlord will not want rent deferral to be the first course of action); (5) outline the financial health of your company and business model prior to the virus outbreak.
- The Landlord’s Position: It is important to note that Landlords also will find themselves in a precarious position with their own sets of challenges, obligations, debt payments, and employees. They are, after all, also a business. According to Baker Donelson, “(o)ften there will be debt-to-income ratios and other covenants that require a certain amount of rental revenue on a monthly or annual basis. Any workouts with tenants will need to comply with those requirements, unless relief is negotiated with the lender.” All that said, in most cases, it will be easier and cheaper for the Landlord to come to work-out agreements like rent deferral, blend and extends, and other negotiated forms of payback than to litigate and re-tenant the space. Again, early communication is key.
- Insurance: Leases often have a requirement of business interruption insurance. In our discussions with insurers to date, it seems unlikely this clause will come into play in most cases. However, it is still important to review your policy with your insurer and counsel. According to Baker Donelson, because “business interruption coverage is ‘property’ coverage, business interruption insurance generally only protects against interruptions in business activities resulting from physical damage to property.” That said, in certain extreme circumstances if the property itself has become uninhabitable due to viral effects, there may be cause for pursuit.
- Government Relief: According to an SBA press release, “(t)he U.S. Small Business Administration is offering designated states and territories low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19).” There are likely to be many qualifying factors, but this should certainly be a course of action to pursue in addition to the above options, and others. In our conversations with various organizations to date, the expectation is that this will be a medium-term solution, and SBA money is unlikely to filter through in the short term. In the meantime, rent will still be due for Tenants.