Proactive advice for landlords and tenants who are navigating the COVID-19 crisis
As soon as the coronavirus began its relentless march around the world, one phrase was repeated by world leaders, experts, local officials, and neighbors: “We’re all in this together.” In many ways, that sentiment applies as we all try to negotiate the economic impacts of the COVID-19 pandemic. This is an all-hands-on-deck moment for an overwhelming majority of industries, including commercial real estate (CRE).
While many aspects of the emergency are unpredictable, it has certainly brought us together because we are all worried. The pandemic comes with a giant question mark: How do we do business today to prevent a domino effect tomorrow?
What landlords can do
In many ways, landlords are caught between a rock and a hard place—wedged between compassion for the economic plight of tenants and their own financial obligations to lenders and tax collectors. Given that position, landlords may want to use a multi-pronged approach, one that can adequately balance both short- and long-term issues. Here are some crucial steps:
Review leases. Looking closely at the terms helps property owners understand their rights. Still, they should also know that some of those rights may be limited due to crisis-centered government regulations and social pressure. Miami-Dade is one locale that has already banned commercial evictions during COVID-19. That being said, this review will help landlords proceed in an informed way when meeting with tenants.
Review loan documents. Many CRE loan documents contain clauses
requiring lender approval for any lease amendments—which may be necessary when
instituting flexible arrangements.
Meet with tenants. Looking at the big picture, the coronavirus
shutdown is temporary. When life returns to normal, it will be important for a property
owner to have fully operational tenants rather than a row of vacant spaces. The
sooner tenants can be back in business, the quicker property owners can. Meet
with tenants to collaborate on strategies to smooth this transition.
Be creative and flexible. Learn what tenants need and explore ways to achieve a result that works for everyone. With an eye toward both tenant survival and owner loan obligations, solutions can take several forms:
- Short-term rent deferment
(with repayment made in monthly increments or at the end of the lease, once the
economy is up and running).
- Temporary rent reduction.
- Payment of only the tenant’s
share of common expenses.
- Applying the tenant’s security deposit toward rent and replenishing it after the crisis is over.
Whatever is decided should be put in writing and signed by all parties.
What tenants can do
CRE tenants also have their own concerns and responsibilities—to customers, employees, and their families. They have to develop a fiscal plan to survive. Depending on the business and the lockdown rules that are in place, this can mean operating on a limited basis or as a pop-up, or moving to an online format. Most potential steps involve talking with your landlord.
Be prepared. Just like the owner, the tenant needs to know the lease and all financial needs so the business can adjust and survive. Remember, it is usually in the landlord’s interest to maintain viable tenants long term, so carefully evaluate if you can weather the storm and communicate the steps you are taking to do it. As in any negotiation, both parties will have to find common ground.
A brief word about clauses and provisions
Any discussion of how to prepare wouldn’t be complete without a word about business interruption insurance, civil authority clauses, and force majeure. As both owners and tenants seek ways to stay afloat, these three items are in the spotlight:
- Business
interruption insurance
is usually added to property insurance or as part of a broader insurance
package. It’s most often used to compensate for lost income should a business
need to close down as the result of a fire or natural disaster. Typically, it
covers operating expenses, payroll, taxes, loan payments, or a move to a
temporary location until any damage is repaired. Unfortunately, due to the outbreak of SARS in 2003, most business
interruption coverage now contain an exclusion for losses due to virus.
- Civil
authority clauses, an uncommon form of coverage,
are designed to protect landlords and tenants from monetary losses if public
authorities bar access to their commercial properties.
- Force majeure is a provision that relieves parties from performing or completing contractual obligations as the result of some a “superior force,” typically a natural disaster.
Because of the current situation, what constitutes a “natural disaster” is now more of a gray area. It’s unclear how insurance companies and the judicial system will interpret each of these categories, but be aware of how they may apply to your situation and any negotiations.
Morris Southeast Group is here for you
On March 27, the White House signed the CARES Act, a $2 trillion coronavirus stimulus package that includes economic stimulus funds to assist small businesses, consumers, industries, and state and local governments. While this is undoubtedly a tremendous fiscal help, receiving these funds will require aggressively pursuing small business loans and other assistance. And this money won’t go far if we fail in our relationships with one another.
It’s a bit like the scene at the end of the classic film It’s A Wonderful Life. The people who filled the Bailey house didn’t automatically show up to help George. That kindness was the result of his years of cultivating relationships. And as corny as all that may sound, our relationships with one another are going to help all of us manage this crisis—and serve everyone’s practical long-term business interests.
Relationships have always meant a lot to us at Morris Southeast Group. As we all look at the question marks ahead, our team is here for you. We will get through this together.
To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
Tags: Business interruption insurance, Coronavirus, COVID-19, small business loans
