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Dealing With Defaults: Options and Solutions for Commercial Landlords During the Pandemic

August 10, 2020

Commercial landlords will likely continue to see tenants struggling to pay rent as a wide range of industries copes with the ongoing effects of the pandemic.

To protect themselves and their long-term financial stability, landlords should consider taking steps now to best situate themselves to respond to defaults as they arise.

Evaluate each tenant individually.
Demanding strict compliance with the lease may not be the best solution for all tenants. Consider not only your tenant’s unique situation, but also your own. Has the tenant’s business taken a real hit? Can they realistically survive if the landlord defers rent payments or provides some other form of rent relief? Or would such steps simply prolong the inevitable? What are your chances of recovering anything from this tenant if you demand strict performance and they default? What are your chances of being able to replace the tenant with one who can pay the rent?

The answers to these questions and similar ones should guide your decision-making with respect to each tenant. Asking the tenant for documentation of its financial situation (sales figures, profit and loss statements, bank records, etc.) will aid in this analysis.

Consider creative solutions.
Rent relief can take a variety of forms. At one extreme, you could agree to forgive rent for certain months or renegotiate the terms of the lease to provide lower rent. But rent relief can be more modest, such as deferring rent for months when the tenant was forced to be closed. One option to defer rent is to break up the deferred amount into monthly payments to be made in addition to regular rent payments when the tenant has resumed operations. Another way might be to push payments out further in exchange for an extension of the lease term for an equal number of months.

Similarly, consider requiring the tenant to apply for available assistance (such as PPP loans) and keep the landlord apprised of those efforts, agreeing that a certain percentage of those funds must be applied toward rent consistent with any statutory requirements.

Comply with the lease and any applicable laws or orders.
Before exercising any rights, a landlord should ensure it has checked all the boxes required by the lease. For example, have you given the tenant any required notice? Did you communicate the notice in the proscribed way? When did the cure period start to run? Have you given the tenant sufficient time to respond? Likewise, while many state and local eviction moratoriums have or will soon expire, there may be lingering effects in those laws, such as an obligation to allow the tenant additional time to pay certain outstanding amounts. Evaluate the current status of the law and its potential impact on your particular situation.

Any efforts to recover possession and/or damages related to the breach could be significantly hampered if you fail to comply with the lease or applicable laws and orders. In some jurisdictions, like North Carolina, those damages can be significant, including any rents that would have become due over the remainder of the lease term.

Reserve your rights.
Most importantly, landlords should always be sure to reserve their rights in order to retain maximum flexibility to change their approach as things change. Whatever you agree to, document it so that everyone is clear on the terms of the relief. When offering rent relief, consider including a term in that agreement that the tenant’s failure to comply with the terms enables the landlord to recover possession of the premises and to pursue any other rights available to the landlord for such a default under the lease or at law. Likewise, you might want to agree that all payments will be applied to the oldest outstanding balance regardless of any notation by tenant to avoid a dispute over whether you have waived the right to declare a forfeiture by accepting rent for a period of time after the default. Whatever you agree to, make sure it is clear that you are agreeing to the terms to accommodate the tenant and that any obligations to accommodate the tenant will terminate if the tenant fails to comply with the terms.