Mass unemployment and business closures caused by the COVID-19 (coronavirus) pandemic presents unprecedented challenges for millions of Americans who own or rent real estate. As the situation continues to escalate, businesses and individuals find themselves in unparalleled circumstances with unanswered questions—one of the foremost being how to make rent and mortgage payments.

This article provides an overview of steps that tenants, landlords, and owners should consider relative to leases and loan agreements to better navigate disruption from the coronavirus pandemic.

For Tenants

1.    Review Lease Documents and Know Your Rights

This especially relates to the following:

• Force majeure rights. These are rights related to unforeseeable circumstances that prevent you from fulfilling a contract.
• Timing of rent payments and cure periods. Cure periods are typically a specified time period after a payment is due. A tenant can still pay rent during this period without incurring additional fines or penalties.
• Co-tenancy provisions. If other tenants aren’t in occupancy, you may have rights to rent reduction, temporary rent relief, or lease termination.
• Landlord obligations. If your landlord fails on its obligations, this may allow some flexibility or leverage in modifying your lease terms.

2.    Utilize Bargaining Power

Landlords will likely be under pressure too—especially those in retail environments. However, the best way to work through this time is by retaining occupancy—some rent is better than no rent. Prudent landlords will try to retain occupancy even at the cost of rent reductions and modified lease terms. Suggesting these alternatives to eviction could be beneficial for both parties.

3.    Be Proactive

Communicate early and often with stakeholders, including landlords and lenders, about your circumstances. Devise a plan of feasibility based upon current and expected future conditions and be proactive about getting landlord and lender approvals when necessary. 

For Landlords and Owners

1. Review Documents

Review lease documents and loan documents and understand your rights, especially relating to:

• Force majeure rights
• Timing of rent, loan payments, and cure periods
• Landlord obligations—make sure you avoid failure on key operational obligations

2.    Revise Your Leasing Strategy

In times of uncertainty, it’s important to utilize defensive strategies and aim to retain occupancy—even if it means offering concessions, such as:

• Rent reductions
• Temporary rent relief
• Lease modifications

Offering these types of concessions to retain your tenants should help to reduce long-term damage that could come with evictions and potential extended vacancies. Keep in mind, modifications may have accounting and tax consequences, so check with your advisor.

3.    Be Proactive

Communicate early and often with tenants, owners, and other stakeholders, including limited partners and lenders. It’s important to devise a feasibility plan based on current and expected conditions and be proactive about getting owner and lender approval, if needed. 

4.    Limited Partner and Investor Involvement

If you have limited partners, your fiduciary role is critically important. Communicate your plans and actions on a regular basis with your partners and investors.

If you don’t have an advisory board consisting of major investors, consider forming one on an ad-hoc basis and discussing all major decisions regarding lease and loan modifications with your advisory board. Be sure to communicate your proactivity, hard work, and commitment to protecting your investors’ interest through this period.

5.    Revise Financial and Cash-Flow Projections

Conduct scenario planning with updated, realistic financial projections and possible impacts to company profitability and investor returns. This can help you devise a long-term plan for your financial success.

6.    Look for Opportunities

As evidenced by the massive recovery and value creation that has taken place since the Great Recession of 2007–2009, the current economic situation could provide a window of opportunity to reposition your portfolio, make acquisitions, or lock in lower interest rates through refinancing.

We’re Here to Help

Navigating real-estate management issues during times of uncertainty and market upheaval can introduce strategic and operational challenges.

If you have questions about how you or your business can move forward with confidence—including restructuring strategies, reviewing portfolios or documentation, navigating negotiations, and more—contact your Moss Adams professional.