Navigating Your Commercial Lease during COVID-19 and Beyond
By Rachel Luna
Throughout the course of the pandemic and various stages of related government lockdowns, many business leaders have dusted off their commercial lease, often for the first time since signing it. These lease reviews are generally being conducted to understand any options available for delaying or lowering monthly rent as well as terminating the lease. The following information should help businesses with these matters as well as provide some direction for issues to consider in the future when executing new commercial leases.
Should I review the law, the lease, or both?
You should review both. First, you should take the time to understand the impact of the governing law. While many safeguards are in place for residential tenants, similar protections often do not exist in commercial leases. This distinction is based on many presumptions, including the fact that the lease does not involve a residence as well as the presumption that both parties in a commercial lease are sophisticated and do not need such protections.
In Texas, for example, the language of a commercial lease supersedes any default provisions of the law, including the requirement that would otherwise compel commercial lease landlords to go to court before evicting a tenant. Even in jurisdictions where the lease does not supersede the law, however, it is critical to review certain sections of your lease, as described below.
Can my landlord lock me out or evict me if I only pay part of my rent or pay my rent late?
Probably. Most leases include failure to pay rent as a material breach of the lease, which can result in the tenant being locked out and/or evicted. However, it is important to review the relevant terms of your lease to confirm this as well as to understand whether you have a grace period for payment of the rent.
Lockouts. Texas law explicitly allows lockouts. However, as explained above, the lease may override the law regarding tenant lockouts, as demonstrated in the following sample language:
Landlord may not avail itself of self-help or lockout remedies and may only dispossess Tenant in accordance with the procedures set forth in Chapter 24 of the Texas Property Code.
Eviction. To determine whether your landlord can evict you without going to court, you should review your lease for a Default or Breach section (sometimes called by another name such as Tenant’s Default or Tenant’s Breach), which generally includes a list of actions/inactions by the tenant that result in default of the lease. This list almost always includes tenant’s failure to pay rent (often with a short grace period) as an event of default, and may include language such as the following:
Tenant shall be in default under this Lease if upon Tenant's failure to pay when due any installment of rent provided such failure continues for a period of five days after the due date without any notice or demand being required.
Next, review the Remedies section (sometimes called by another name such as Landlord's Remedies) to understand what your landlord can do if a tenant defaults; an example of this section is as follows:
Landlord and its agents may immediately, or at any time thereafter, reenter the premises or any part thereof, either by summary proceedings or by self-help or otherwise (without being liable to indictment, prosecution, or damages therefor), and repossess the premises, dispossess Tenant and any other persons from the premises and remove any and all of their property and effects from the premises.
If your lease does not include self-help language (which may be referenced by a different term in your lease), your Landlord may be required to get a court order before evicting you.
Can I postpone or decrease my rent?
Possibly. Be sure to review your lease to determine whether you are legally entitled to postpone payment of your rent, often found in a provision entitled Rent Abatement. However, be advised that it is typical for abatement opportunities to be narrowly defined in commercial leases if allowable at all.
One clause that received heightened attention at the start of the COVID-19 pandemic was the force majeure clause (which generally forgives performance of a contractual duty when caused by events out of a party’s control). While you should review this language, it is important to note that “payment of rent” is generally excluded in these clauses (i.e. even if your lease contains force majeure language, you will likely still be required to pay rent).
Also, keep in mind that although it is not legally required, many landlords are willing to work with existing tenants to retain them. This has been especially true during the pandemic. To explore this option, early, honest, and frequent communication is key. Accordingly, while you should be careful to ensure that you do not inadvertently breach your lease during such communications, it is often a good idea to contact your landlord to discuss options. Possibilities you may wish to propose or consider include deferring rent and spreading unpaid amounts over the term of your lease, subleasing part of your space to another tenant, canceling/downgrading certain services (such as parking, phone, or internet services), and/or moving to a smaller space.
Can I terminate my lease?
Possibly. When included, early termination clauses are heavily negotiated and often very expensive in commercial leases. To determine whether an early termination clause exists, you should review the Term and Termination sections (please note that early termination provisions are often standalone within the lease). If you do have an early termination option, be sure to comply with any notice requirements and be mindful of any ongoing obligations. An example of language granting an early termination follows:
Tenant shall have the right to terminate this Lease at any time during the Term, or any modification, extension, or Renewal Term hereof, upon issuance of 90 days written notice to Landlord stating the “Termination Date” in the event Tenant’s State Contract is terminated. Upon satisfaction of the foregoing conditions, Tenant’s liability for rent and for all other covenants of this Lease shall terminate on the Termination Date stated in Tenant’s notice. Such termination shall be without loss by Tenant of any prepaid rent, security deposit, prepaid taxes or other similar sums, and Landlord agrees to refund same upon reasonable accounting between the parties within 30 days after Tenant surrenders the Premises.
As with decreasing or postponing rent, your landlord may be willing to allow you to terminate or transfer your lease obligations, even if the landlord is not required to take such action. Again, ongoing communication is crucial if you want to explore such possibilities, and you should always be careful that your communications do not inadvertently trigger a lease breach. Possible options you may wish to propose or consider include subleasing your space (which will often require you to remain responsible for the remainder of the lease), selling your business (and including the lease as a part of the sale), and paying out a percentage of the amount owed on the remainder of the lease in exchange for an early termination of the lease.
What else should I consider?
Confirm whether you or anyone else has signed a personal guaranty on the lease. Whether you or anyone else will be personally liable for the debt of the lease will have an impact on determining best next steps
Keep in mind that you are not alone in confronting this issue. Commercial tenants from all lines of business hit hard times. We have all seen tenants that are locked out in the best of times, and during COVID-19 some of the largest, most respected businesses in the country have faced uncertainties and concerns with how to move forward. Thankfully, governmental authorities, nonprofit organizations, and communities often work together to help businesses survive during challenging times.
You should tap into any resources available to you. For example, in addition to working with a lawyer to review your lease, you may want to contact your insurance broker to determine whether a recent loss is covered by any insurance policies you have in place. Likewise, you might consider reaching out to a nonprofit who may have funding to help you through your current situation or take some steps to let your consumers know that you are struggling and let them know how they can help.
This update is for informational purposes only and does not provide legal advice. Every legal situation is different and must be independently analyzed by an attorney. Please consult with an attorney for specific guidance.
About Luna Law, PLLC
Luna Law, PLLC, provides a wide array of legal services to small businesses, from the creation of corporate entities and contract negotiation to employment counseling, risk mitigation, and compliance with local, state, and federal regulations. Contact the firm for a consultation or visit RachelLunaLaw.com for more information.