CORONAVIRUS UPDATE FOR COMMERCIAL TENANTS

Negotiating Success

CORONAVIRUS UPDATE FOR COMMERCIAL TENANTS

As we all try to navigate through this pandemic, businesses of all sizes are struggling in every way imaginable.  Not only are they faced with the prospect of having to let valuable employees go, they understand that the prospect of continuing operations diminishes each day the pandemic related shut down continues.  Those businesses that haven’t already failed, are living on the edge looking for ways to make it through the next few months.  Some are fledgling businesses, some have been around for decades and others are just hitting their mark becoming profitable after years of dedication.  What they all have in common now is a virtual shut down of their markets and loss of revenue.  Unfortunately, without revenue, business owners are unable to pay themselves which in turn makes it difficult if not impossible to meet their personal economic needs.  In addition, there are significant business outlays that cannot simply be put on hold.  Insurance, equipment leases, business loan payments, rent and other similar monthly expenses are contractual obligations that cannot be ignored.  Many will necessarily be driven to bankruptcy.  Generally, the most significant contractual obligation of small and medium size businesses is their commercial lease.

At the Law Office Donald R. Oder, we regularly negotiate with tenants and landlords regarding the early termination of commercial leases.  These negotiations are extremely fluid, and while terminating a commercial lease early is not painless, a reasonable compromise is usually reached.  As the current pandemic continues to plague our society, how landlords view early terminations becomes even more fluid as landlords begin to anticipate an onslaught of late payments and lease abandonments.   

What Are Your Options?

The Current Moratorium:  Preliminarily, it’s important that you do not rely on the current moratorium on evictions (and the virtual complete shutdown of California courts).  While your landlord is presently unable to move forward with any unlawful detainer actions (evictions), you will still owe rent and when the moratorium is lifted, many landlords will move straight to the eviction process. 

Continue in Your Lease:  If you believe that your business can weather the storm but may be late on some of its obligations (including rent), then it is likely best to simply contact your landlord and have a discussion.  In these extraordinary times, your landlord should be willing to work with you.

Stop Paying Rent and/or Abandoning the Premises:  If it is apparent that you can no longer continue operations under any circumstances, you could simply stop paying rent and/or abandon the premises.  This option is not recommended (except perhaps where bankruptcy is a possibility, and even then, you will need to consult with a bankruptcy lawyer before acting).  If you stop paying rent, your landlord will almost certainly look for the first available opportunity to begin the eviction process.  If you abandon the premises, your landlord will file a separate lawsuit seeking damages (past due rent, future rent, recovery of free rent and tenant inducements, attorney fees and other legal costs, etc.).  Either way, you will be forced to either participate in costly litigation or ignore the lawsuit entirely allowing your landlord to obtain a default judgment.  Upon default judgment, in addition to a significant hit to your credit, your landlord will seek to garnish your wages, levy your bank accounts and place liens on your property.  If you have a business still operating, a till tap can be obtained allowing the Sheriff to take cash directly from your cash register.  Of course, this may matter little if you are facing eminent bankruptcy.  If not, costly litigation and/or a judgment against you is not a pleasant option. 

Negotiate an Early Lease Termination Agreement:  If it is apparent that you can no longer continue operations under any circumstances, the best option is to try and negotiate for the early termination of your lease.  While the outcome is rarely painless, it is generally the best way to stop the bleeding.  If you opt for this route, it’s important to avoid the institution of legal proceedings against you and/or abandoning the premises.  Your bargaining position will be reduced under these circumstances. 

We start by analyzing pre-pandemic negotiations. Landlords’ are most interested in making themselves whole.  They desire to reduce their damages to zero and expect tenants to absorb all losses (as most commercial leases call for).  This means recovering all past due rent, all tenant inducements, future rent, attorneys’ fees, broker fees and legal costs.  Tenants on the other hand want, and often need, to pay as little as possible.  In most cases, landlords and tenants are able to compromise.  Often, landlords realize that a tenant is on its last legs and continued collection efforts may be fruitless.  Where it’s clear that a tenant has limited resources, it sometimes is more practical to strike a deal even if that means accepting a payment plan.

In virtually all negotiations, the overriding concern is future rent.  Landlords require future rent in order to assure that there is no gap in rent between the existing tenant’s termination and the start of a new tenancy.  The debate turns on the expected time it takes to secure a new tenancy.  Landlords want as much future rent as possible to cover the uncertainty associated with filling the space.  Tenants argue the opposite.  Future rent is almost always the largest component of any lease termination payoff.  There are a host of other issues at play relating to costs associated with finding a new tenant and the recuperation of free rent and tenant improvement allowances that are beyond the scope of this article. However, the foregoing sets forth the framework from which negotiations are conducted.

Analyzing this in the context of the current pandemic crises, the only thing certain is that the problems facing tenants and landlords alike are unprecedented.  It is difficult to know how landlords will react to the crisis.  Many landlords (including mom and pop owners) depend on the revenue from their commercial properties as their only source of income.  This crisis will affect them just as deeply as it is affecting tenants.  Corporate landlords will look for ways to minimize the looming harm.  Either way, it seems to this writer that all landlords are certain to understand the extraordinary times we are in and all landlords will adjust their negotiation tactics accordingly.  Minimizing losses in this climate may mean giving tenant’s free rent or agreeing to share the burden by reducing the rent for a period of time.  After all, replacing tenants during the pandemic may prove impossible and with a pending recession, expectations for the future are not likely to be optimistic. 

Time Is of the Essence:  It will not be long before landlords are inundated with requests for free rent, reductions in rent and requests for early lease termination.  Once that starts, landlords’ willingness to cooperate with tenants may change drastically as they come to realize just how bad the pandemic is affecting their tenants.  Ideally, tenants (who are certain they will not be able to continue) will reach an early lease termination agreement with their landlord prior to this onslaught.  Landlords are still coping with the coronavirus pandemic and there is a unique moment in time where virtually every person on the planet understands that we all need to work together towards reasonable solutions to pandemic related problems.  Our hope as a society is that this mind set continues as the pandemic wanes.  However, at this point, there remains considerable uncertainty and acting quickly seems to be the safest course of action. 

During this extraordinary time, The Law Office of Donald R. Oder will represent all commercial tenants seeking early lease termination (or lease modification) for a one-time discounted fixed fee.  Mr. Oder will negotiate on your behalf towards the resolution of all outstanding issues with your landlord including the drafting and negotiating of a final early lease termination agreement. 

Please feel free to contact San Diego attorney Donald R. Oder directly at 619-888-1346 any time.  There is no fee for the initial consultation.