8 Leasing Options to Consider in the Post-COVID Era

NYC-based boutique law firm Pardalis & Nohavicka brings the latest legal updates from the world of real estate. Pardalis & Nohavicka handles an eclectic array of matters, representing individuals and business owners in civil litigation, criminal cases and business transactions, currently litigating and representing clients throughout the United States and around the world. 

Governments have embraced the idea that shutdowns will remain one of the tools used to combat COVID-19 and pandemics, in general. As such, landlords and tenants should explore their options and prepare to negotiate provisions related to such events since statutes are silent on this matter and courts have held that general force majeure provisions do not apply.

Depending on the leverage of each party involved, the following are some options to consider negotiating into the lease:

1. Abatement of rent during the period when the tenant is unable to operate their business due to government-ordered closures: Here, the landlord would reduce the rent in proportion to reduced operation orders, with rent payments to resume upon reopening.

This is an ideal option for the tenant — and also the most difficult to obtain because the landlord will usually protest this. One potential compromise could be to shorten the period of time that the abatement is available. For example, the abatement could expire after 30 to 90 days.

2. Forbearance of rent until government-ordered closures are lifted: While the tenant would still be obligated to pay rent, they would not have to pay when the business isn’t generating any income. In this situation, the tenant will want to negotiate the terms of repayment. One option would be to repay on an amortized basis throughout the remaining term of the lease. 

3. Good guy guaranty: This is commonly requested by tenants. On the condition that the tenant isn’t in default, this guaranty allows a tenant to vacate the space by giving the landlord advance notice (usually anywhere between three to six months) of their intent to terminate the lease.

This can be a good option for both parties: A tenant can cut their losses not only for pandemics and any other public health emergencies, but also in any situation, including, but not limited to, unprofitable operations. The obvious drawback is that a tenant may have made significant investments into the space and exercising the option would essentially result in a forfeit.

Likewise, this guaranty can also be desirable for the landlord as they would not be stuck with a struggling tenant. Similarly, the landlord also wouldn’t have to go through summary proceedings to recapture the property if rent wasn’t being paid. This option would also give the landlord time to look for a replacement tenant while collecting rent.

4. Shorter lease terms due to the uncertainty of the pandemic situation: Granted, this isn’t the most ideal solution because the tenant (and, in some cases, the landlord) can make significant initial investments into the space upon taking possession of the space. Also, if it turns out that the space is profitable, the tenant may have to renegotiate an extension of the Lease at a higher base rent.

However, if the other options aren’t available, this one may be viable for those who don’t have to make such a steep initial investment. It may also be a good solution for landlords who can fill the space with less-than-optimal (but still paying) tenants for a short period of time while riding out unfavorable economic conditions. 

5. License agreement instead of a lease: Licenses generally tend to favor licensors (landlords) because there are no possessory rights to this space. Thus, licensors can evict licensees (tenants) at will and recapture the space after providing little notice — usually 30 days.

But many renters also prefer licenses because they, too, can terminate the license at will — meaning no long-term obligations. Some renters may also prefer licenses if licensors make significant investments into the space in terms of custom buildouts for the licensees, which make it less likely that the licensor will terminate the license.

6. Coworking space occupancies instead of traditional leases: These are also licenses and essentially operate like hotels. Accordingly, they’re becoming more popular because licensors don’t have to make any long-term commitments. Moreover, they also don’t have to invest any money into the space because they’re already fully furnished and wired.

7. “Go dark” provisions: Typically, leases require continuous operations during customary hours.  Conversely, “go dark” provisions allow a tenant to cease operations in its space while they continue to pay rent. Even if they can’t avoid or postpone paying rent, reducing operating expenses during pandemics can be a valuable strategy.

Notably, this provision is usually beneficial for larger, franchise businesses that can afford to pay the rent but not operate. An alternative to this is to “go dim,” that is, to reduce operating hours. This can also help reduce expenses to keep businesses afloat during a pandemic.

8. Automatic extension for the lease term: In this scenario, the lease is extended during the forced government closure. This allows the tenant to fully realize their initial investment in the space.

Of course, these are just some of several approaches to take, and there are other options available. It just takes some creativity and a willingness to negotiate.

About

John Pak serves as the Real Estate Chair at the Law Offices of Pardalis & Nohavicka. He is a transactional attorney specializing in acquisitions, dispositions and leasing.  A graduate of Brooklyn Law School, he received his BA in Political Science from New York University.  Prior to joining PN Lawyers, John owned his own private law practice for 15 years and a title company for 6 years.
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Taso Pardilis

Taso Pardalis is a founding partner of the Law Offices of Pardalis & Nohavicka, a leading full- service NYC law firm with offices in Manhattan, Queens and WeWork. Taso may be a well-known attorney with many cases making headlines in major media outlets, but at heart, he is a true entrepreneur that believes in supporting the small business community. His areas of concentration are: Intellectual Property, Trademarks, Corporate, Business Law and Real Estate Law.

Eliza Theiss

Eliza Theiss

Eliza Theiss is a senior writer reporting real estate trends in the US. Her work has been cited by CBS News, Curbed, The Los Angeles Times, and Forbes among others. With an academic background in journalism, Eliza has been covering real estate since 2012. Before joining PropertyShark, Eliza was an associate editor at Multi-Housing News and Commercial Property Executive. Eliza writes for both PropertyShark and CommercialEdge. Reach her at [email protected]