Although Northern Virginia, Maryland and DC are not yet ready to begin easing COVID-19 restrictions, business leaders are preparing now. What can landlords and tenants do today to survive a challenging second quarter, prepare for reopening, and emerge strong for the rest of 2020? In Part I of OFP’s COVID-19 Commercial Leasing Playbook, we focus on steps that landlords should be considering as they work together with all stakeholders to document a realistic short-term plan and remain flexible in the coming months.
- Maintain safe buildings and make your tenants feel safe there.
- Implement recommended best practices for cleaning, access, use of common areas, high-touch surfaces, social distancing, sanitizing stations in key areas, etc. Virginia Governor Ralph Northam has released recommended best practices for maintaining safe workplaces in all business sectors, which you can view here.
- Communicate new practices and procedures to your tenants, and share recommended return-to-work plans with them – make it easier for them to return to the building and to using the space for which you want them to pay rent.
- Adopt additional health and safety-related building rules in writing and notify all tenants under the terms of the applicable leases; implement practices to promote unbiased and consistent enforcement.
- New rule examples: requiring face masks in common areas, reducing the number of people permitted in elevators, no reusable cups in common kitchens, greater spacing in eating and meeting areas, etc.).
- For tenants with open office plans and shared work spaces, consider taking the initiative or at least providing guidance to help them make the space usable under the various return to work phases.
- Analyze your leases – the leases still govern; consider present enforcement limitations.
- Evaluate your leases for provisions involving force majeure, health emergency, access, provision of essential services, rules and regulations, ability to charge tenants for COVID related costs, whether or not COVID costs are controllable expenses, co-tenancy obligations (as in many retail centers), potential loss of exclusive uses due to non-use, and more. Your lawyers can assist you in analyzing the lease provisions relevant to you and your tenants.
- If a tenant is in breach and you’re not willing or able to waive or defer the issues, there are several considerations. First, there are few new potential tenants in the market, and you may prefer a defaulting but present tenant to a dark space. There are currently no Maryland or Virginia laws prohibiting the enforcement of commercial leases; however, courts in these jurisdictions are not taking commercial eviction cases yet, and we anticipate a backlog once courts do reopen.
- In DC, landlords may not file a complaint to evict a tenant during the current public health emergency declared by the DC Mayor, and for 60 days after it ends. Self-help evictions are not permitted in DC. Also note special protections for DC retail tenants – click here
- In Virginia and Maryland, landlords are not prohibited from issuing default notices, filing suit, and otherwise acting to enforce commercial leases as expressly permitted under the lease (and in all events, landlord must not create a breach of the peace or use unreasonable force); but as a practical matter it will take some time before landlords are able to back up their actions with judicial evictions. Landlords should consider that Maryland courts have expressly discouraged self-help, and in all cases, self-help involves a risk of liability to landlords (such as for damaging Tenant’s personal property or using excessive force).
- Discuss financial issues with tenants and implement plans in writing – it is in both Landlords’ and Tenants’ interests to weather this storm and achieve long term success.
- Hopefully you’ve already encouraged your small business tenants to apply for a Paycheck Protection Program (PPP) Loan which they are using to pay rent for two months;
- When tenants request forbearance or deferment of rent, provide a reservation of rights letter, to ensure your discussions do not create an oral agreement or waiver of rights, or establish a course of conduct. Your lawyer can help draft the letter.
- Require confidentiality from tenants – COVID-19 restrictions impact us all, but the exact impact and appropriate response for each tenant may differ (fairness does not require the same response for each commercial tenant, and the decisions should be in landlord’s discretion).
- Assistance to tenants may include: rent deferrals (the most common) sometimes with a term extension, rent abatements, application of security deposits (to be replenished in the fourth quarter), loans from landlords to tenants, forgiveness of late fees, interest and attorneys’ fees (if repaid as required in the lease amendment), or a 5% discount if paid on time or early.
- Obtain meaningful information from your tenants about their plans to ride through this storm, and develop a lease plan that makes sense. Remember, most leases give landlords the right to see tenants’ financial records; request them if appropriate to devise and support a plan that is feasible in the long run. (i.e., if a tenant’s sales have only decreased by 20%, for the past two months, a six-month rent abatement is not appropriate or needed at present.)
- Put any agreement in writing, preferably via a lease amendment, signed by all parties and approved by your lender (if required). Your lawyer can help.
- Consider adding any other terms needed to clean up outstanding lease issues, add desired terms to address public health emergency issues, and obtain waivers and estoppels from tenants, but try to keep it simple.
- Don’t plan too far ahead and leave some flexibility, given remaining uncertainty surrounding the ongoing impact of COVID-19.
- Discuss lease amendments/modifications with your lender.
- Communicate carefully and truthfully – open lines of discussion without stating that you cannot pay debts when due; be careful not to trigger any personal or corporate guaranties.
- Your loan documents may require lender’s approval of lease amendments, and any modification (whether by letter, side agreement, or otherwise), can be considered an amendment that is subject to lender’s approval.
- Rent abatement or deferral agreements with tenants may impact your financial covenants, such as debt service coverage ratios, and you’ll need a written waiver from your lender (oral forbearance and emails are better than nothing, but are risky); Don’t agree to a lease forbearance or deferral agreement that would cause you to violate your loan documents unless and until you have a comprehensive signed written waiver and consent from the lender.
- Prepare for the future
- Be prepared for increased audits of 2020 operating expenses. Carefully document all expenses, including COVID related expenses, and categorize as defined in your leases.
- Be creative to attract new tenants; consider:
- Offering pro-rated abatements for non-use or diminished use during a health emergency (with your lender’s approval);
- Extended time for completion of improvements and delayed rent commencement – day-for-day for any material delay caused by a force majeure event (including health emergency or governmental order), including supply chain issues;
- Implement and promote tenant safety and wellness features of your buildings.
While most of Virginia moves into Phase I of easing stay-at-home restrictions beginning May 15, Northern Virginia is not expected to enter Phase I until May 29, and Maryland and DC are expected to maintain existing restrictions. The commercial real estate attorneys of Odin Feldman Pittleman are ready to assist you with your specific leasing matters as you prepare for reopening.
For more information, contact OFP Shareholder Jennifer Banks at 703-218-2180 or OFP Shareholder Leslye Fenton at 703-218-2109
COVID-19 and Commercial Leasing, Part II: Practical Advice for Tenants
COVID-19 and Commercial Leasing, Part III: New Requirements for DC Retail Tenants and their Landlords