Negotiating Rent Relief And Force Majeure In Retail Leases In A Post-Pandemic World
Negotiating Rent Relief and Force Majeure in Retail Leases in A
Post-Pandemic World
The COVID-19 pandemic has created a new focus on how landlords and tenants negotiate force majeure provisions in retail leases. During the pandemic, tenants looked to force majeure (as well as other theories) to try to obtain rent relief, when government quarantines and other pandemic-related factors temporarily forced their businesses to close or substantially limited their availability to be open to the public.
Tenants looked to force majeure provisions and claimed that “acts of god” and/or other specified force majeure exemptions excused them from their lease obligations, including the obligation to pay rent. However, when drafted appropriately, most force majeure provisions specifically provide that force majeure events do not excuse tenants from paying rent and other financial obligations under their leases – and courts generally agree.
As a result, when negotiating new leases, tenants are now attempting to change the way force majeure provisions have been typically negotiated by specifically addressing rent relief in the event of future (and even current) pandemics, epidemics and similar catastrophes. In particular, many tenants are seeking rent abatement in the event they are not able to fully operate as a result of future impacts of the pandemic and future pandemics.
Needless to say, landlords are not overly interested in accommodating tenants on this issue, because it potentially negatively impacts rent and cash flow. However, the pandemic also impacted the retail sector by causing many tenant closures and vacancies, so that in some situations, landlords now may have to engage with tenants on the issue to secure new tenancies. But, like with many lease issues, whether a landlord agrees to negotiate pandemic related provisions will depend on the relative bargaining strengths of the parties, tenant creditworthiness and a balancing of the risks.
Many well-positioned landlords will not agree to rent relief in the event the current or future pandemic or future catastrophes require more business interruptions. The retail economy is rebounding, and tenants are entering into leases with “eyes wide-open,” knowing the risks involved and the recent history of quarantines and temporary closures. Those risks must be factored into the tenants’ business analysis.
Some strong creditworthy tenants, with significant bargaining strength, may be able to force the issue with certain landlords. When this is the case, the landlord should attempt to balance the risks, by sharing the rent relief/rent payment burden with the tenant as much as possible – for example if rent relief is requested, perhaps only 50% rent relief should be provided, so that each party shares the burden for a negotiated period of time (with a potential end date for the tenant). In addition, when rent relief is permitted, the relief should apply only to fixed, base or minimum rent. There should be no rent relief for the tenant’s share of triple net charges and additional rent, which will continue to accrue and be incurred by landlord, without notable reduction.
When negotiating a provision that provides relief for a tenant, it should be clear that the tenant’s rent relief will only commence when the tenant is legally prevented from operating pursuant to applicable governmental orders (issued by authorities with jurisdiction over the subject property). Some tenants may attempt to negotiate rent relief simply upon the onset of a pandemic, epidemic, public emergency or orders issues by the WHO (World Health Organization) or similar organization. These occurrences are not likely to be enough to require closures. Unless a governmental authority with jurisdiction over the premises recognizes the pandemic or epidemic and issues the order requiring businesses to be closed, the tenant’s business is probably not required to be closed.
In addition, when negotiating rent relief in force majeure provisions, some landlords will want to require that the applicable tenant be unable to operate in any manner from its premises or the shopping center. If a tenant is able to operate in the common area or patio area (which was typical for many food users during the quarantine periods of the present pandemic), provide delivery services and/or deliver products to customers in the parking areas of the shopping center, then the landlord may not be willing to agree to rent relief.
There are many creative ways for landlords and tenants to negotiate and address rent relief in the event of closings due to pandemics. The outcomes of those discussions will undoubtedly be the result of many factors, the most significant of which will be the strengths of the parties’ negotiating positions during lease negotiations.