C.L.U. for 4/17/2020

• April 17th, 2020
• News

Commercial Leases are now officially a mess.

Small businesses have been shutdown everywhere and now Landlords are demanding rent when there are no profits for businesses to pay for it.

Landlords and tenants are in a bind.  Here are some suggestions for both.  Many of the solutions are similar, but with some key differences:

1. What is a Tenant to do?

FIRST: Read your lease.  Read through it carefully.  Focus on the force majeure provision, the condemnation provision and the quiet enjoyment provision to see if they can help with an argument of rent abatement.  Highlight any other provisions you believe may help.  If you are unsure, speak to an attorney.  Be sure to know whether you signed a personal guarantee for your entity.  If you signed a personal guarantee, your individual assets could be exposed in a lawsuit.

SECOND: Talk to your Landlord.  See if it is willing to be reasonable and offer rent abatement (forgiveness).  For most businesses rent abatement should be considered not just for the short term, but long term as well.  Businesses will not be right back where they were before the shutdown.  Do not listen to the fairy tales being pushed by some in the media and in government.  All is not well.

THIRD: Present Landlord legal arguments for rent abatement.  You may ask, why not start here first?  Because tenants should recognize Landlords are also in crisis.  When you begin negotiations by mounting the legal arguments you invite confrontation and litigation.  While lawyers may love litigation, any businessperson who has been involved in a lawsuit knows that most of the time lawsuits are lose-lose scenarios.  The Court system is backed up and the process is inefficient at best even without a pandemic, so legal threats fall on deaf ears to many savvy business professionals.

Occasionally, a Landlord is unaware that a provision in the Lease may favor the Tenant in these situations.  In the words of G.I. Joe “Knowing is half the battle.”  A recalcitrant Landlord may reconsider its position once confronted with a winning legal argument, but the argument should be presented carefully.

FOURTH: Terminate the Lease.  If your Landlord fails to offer a reasonable solution and you have no personal guarantee, consider terminating the Lease.   The entity will get sued and if the entity has assets, such assets will be vulnerable to seizure unless otherwise legally disposed.  But many businesses do not have many assets at risk of forfeiture. Plus, Landlords may be willing to agree to termination of the Lease. 

IN SHORT: In the absence of clear guidance from the government, many commercial tenants may still be liable for rent, and need to be proactive in working toward a resolution with their Landlord.

1. What is a Landlord to do?

FIRST: Read the Lease.  Now may be a good time to think about updating the Lease template. Does your Tenant have a clear argument for refusing to pay rent?  Many force majeure provisions do not allow rent abatement.   Did Tenant’s owner sign a personal guarantee?  If not, are there any assets to seize?

SECOND: Talk to your bank.  If a Landlord has tenants behind in rent, it should immediately contact its bank and request forbearance.  Most banks will be willing to grant some reasonable forbearance during this crisis.  Banks, like landlords, should recognize the increased inefficiencies of the legal process during this pandemic. 

THIRD: Talk to your Tenant.  What can it afford to pay?  If you are unreasonable, your Tenant will likely pay you nothing.  If you are inexperienced in legal proceedings, speak to an attorney you trust about the real efficiency of such proceedings.   Winning a judgment is far different than collecting.  Ensure your attorney walks you through the timeline for the whole process.   Keep in mind: Eviction and foreclosure proceedings are suspended until at least May 1, 2020 in South Carolina because the Courts are closed. 

FOURTH: Renegotiate the Lease.  If this is a good Tenant, consider using this as an opportunity to renegotiate the Lease, and extend the term.  No one knows where commercial rents will go after this, but speculation would be prices are going down.  A good Tenant may be willing to sign on for a longer term if it sees a Landlord being proactive during a crisis.

FIFTH: Terminate the Lease.  Unless this a high dollar Tenant that a Landlord absolutely cannot afford to lose, the smart Landlord may want to forego the costs of extended litigation and come to a quick and reasonable termination of the Lease for unreliable tenants.  Tenants will typically agree to pay a reasonable fee in this situation and may even be relieved their Landlord has offered this remedy.

IN SHORT: The savvy Landlord will make business decisions during this crisis and use it as an opportunity to work with good tenants and perhaps to cut ties with problematic tenants in a fashion that avoids costly and inefficient litigation.The Miller Law Firm, P.A. is prepared to help both commercial tenants and landlords work through this process and remains ready to help.  Please feel free to call us at (864) 527-0413 to set up a consultation.