Our readers may be pleased to hear that mask mandates are falling like dominoes throughout the area served by our attorneys. This newfound attitude heralds a time of optimism. However, the scars created by the COVID era remain, particularly with respect to commercial leases. This post will examine some typical provisions in commercial leases that should be reconsidered and negotiated in light of changing times.
In many commercial leases, landlords will prefer strict definitions as to use of the premises and signage permitted on the premises. For instance, if the tenant is a fitness facility, the landlord may draft the use clause very narrowly and identify the permitted use as a boxing fitness studio. Should the tenant have difficulty in operating the location, he will not necessarily be able to sublet to another tenant unless the use is the same. If this particular tenant could not operate a boxing fitness studio during a pandemic, how will he find another tenant who wants to use the space for the same narrow purpose? As such, an experienced attorney will ask the landlord to broaden the permitted use in the lease to fitness studio or any lawful use.
Flexibility is also required with respect to alcohol sales, which may be restricted in a lease. As our readers may recall, during the pandemic struggling restaurants were permitted to sell alcoholic beverages for takeout. This was a lifeline for such businesses and should not be prohibited by a lease, which should permit alcohol sales in accordance with current law and not be further restricted by a landlord. The open restaurants program in New York City permitted restaurants to operate supplemental space on the sidewalk or in the street appurtenant to the restaurant. Lease provisions requiring a tenant to keep the sidewalk clear should be modified to permit use as may be permitted by an open restaurant program.
In the future, stronger pandemic clauses should be included in leases for the benefit of tenants. Unfortunately, government ordered shutdowns forbade the conduct of many businesses during the pandemic unless they were deemed essential businesses. Although tenants typically are required to carry business and rent interruption insurance policies, many tenants were unpleasantly surprised to find that these policies did not cover events such as government ordered shutdowns. Business interruption insurance policies often exclude pandemics from coverage. Rent interruption policies require physical damage to the premises and do not cover loss of rent due to government ordered shutdowns. A qualified attorney should request that rent be abated (not due to the landlord) for any period of time that government authorities forbid the operation of businesses, so that the parties are not reliant on these insurance policies to cover the loss.
It should be noted that landlords may need approval of their mortgage lender to offer monetary concessions to a tenant, even though the landlord may be sympathetic to a tenant who cannot operate during a pandemic. Lenders prefer rent deferrals, which delay the payment of rent due to a later date, as opposed to a rent abatement, which is a complete forgiveness of the amount due. The lender may be concerned that the landlord will not collect enough rent to pay the mortgage on the property.
We have previously written about force majeure clauses. These clauses excuse performance of lease obligations due to acts of god, such as war, famine, and extreme weather conditions, which may make performance impossible. However, tenants may still be required to pay rent. This result defies common sense. Force majeure clauses require attention and should be modified to provide that government ordered shutdowns excuse a tenant’s requirement to pay rent. If the tenant cannot open his retail store due to government order, how can a tenant pay the rent?
Many leases contain amenities, such as use of a fitness facility in the building, or a shuttle van service from the train station to the office building. The pandemic resulted in the suspension or elimination of these amenities. Going forward, tenant’s attorneys should request that leases contain a refund or reduction of rent if the landlord cannot or will not provide these amenities.
The requirement of continuous operation may now be impractical. Continuous operation clauses require a tenant to be open for business during hours required by the landlord. In a pandemic, a tenant may not be able to operate, which should not be considered a default under the lease.
Our firm is available to negotiate commercial leases, going forward, utilizing the lessons learned from the pandemic and looks forward to a return to normal life.