Tenant Strategies and Navigating Covid-19

In addition to impacting the well-being of hundreds of thousand of people all over the world, we are starting to see the effects of the Coronavirus/COVID-19 Affect on Industrial Real Estate, global and local economies and financial markets.

With consumers being advised to stay home and certain businesses ordered to significantly limit their operations or to close on an indefinite basis, many tenants specifically in the restaurant and retail sector, are experiencing problems in managing their employees and paying their expenses including their rent.

 

Increasingly, tenants are approaching landlords and seeking financial assistance for this crises period. Landlords in turn are facing a major dilemma in how to respond to these requests. The financial burden on the landlord is also significant as they still have to pay their mortgages and property taxes. Under a commercial lease, a landlord usually has many remedies available to them in dealing with a tenant in default of their lease due to non-payment of rent or closure of business, however, these are not normal circumstances. With the current crises being so widespread, an incorrect strategy by the landlord can result in significant vacancies and irreversible financial implications.

Are you a Tenant seeking relief from your Landlord and looking for a best practices approach? Are you looking to understand what other tenants, of similar use and size, seeking in rent relief? What are some of the strategies around rent deferral?

 

Considerations for Tenants

 

Before taking any action, tenants are advised to review their lease agreement and seek legal advice on the implications of their potential actions, what would constitute a default of the lease, and legal options available to their landlord.

British Columbia has recently issued a ban on eviction of tenants which has created major misunderstanding amongst many business owners. It is important to understand that the ban, at this point of time, only applies to Residential Tenancies and not to Commercial Tenancies which are governed by their lease agreements and common law.

Some item that tenants need to review are as follows:

• Is the business considered to be a service that has been ordered to close or may it stay open with certain adjustments?
• What action or condition triggers a default by the tenant under their lease? Tenants must remember that in many lease agreements, a default , even if resolved, may take away future renewal options and 1st rights of refusals.
• Under what conditions can a landlord evict them due to closure of business?
• Would the landlord benefit from the property becoming vacant? Does the property have immediate development potential that the property owner would like to take advantage of?
• How much is the security deposit that the landlord holds and under what conditions can a landlord use it?
• What potential coverages are available to the tenant under their commercial insurance policy?
• What other options become available to the landlord if they close their business?
• Is there a “Force Majeure” clause in their lease and if so how is it defined? Does it impact the party’s performance requirements under the lease due to the current circumstances?
• What are the relief programs offered by the Federal and Provincial governments for small businesses? Increasingly many options are becoming available in the form of interests free and low interest loans, payroll subsidies, tax deferments, and more…

After reviewing the above, a Tenant should assess their financial position and understand what best case and worst-case concessions they would require from landlord. As with landlords, tenants also need to understand that a win-win solution is required.

Tenant’s should contact their landlord and explain how their businesses are being affected and be prepared to provide financial data to support their claim.

 

Some Viable Options Available To Landlord’s And Tenants

 

Temporary Rent Reduction/ Basic Rent Free Periods
Deferral Of Rent:
Converting Basic Rent Leases to Percentage Rent Leases
Rent Abatement
Landlord Loans
Use Of Security Deposit
Subleasing

For a more detail review and explanation of the above options and how they would relate to your specific situation, asset or lease, feel free to contact us.

Both Landlords and Tenants should take the time to review the government of BC's COVID-19 state of emergency and preparedness response and recovery plan.