COVID-19 And Commercial Leases Today - Major Developments

12.04.21 08:00 AM Comment(s) By Assetsoft

Commercial real estate has been going through a bumpy ride during COVID-19. It's had its ups and downs, particularly regarding the industries focused on by its tenants. Luckily, things have been looking up lately, especially with the vaccine becoming available.

However, recent news and new coronavirus waves have kept uncertainty in the air. As we’ll see in a moment, new regulations have threatened its recovery rate.

What are these regulations? How do they stack up with other unresolved issues? Today, you’ll learn the latest developments and how they’ve affected commercial real estate.

Coronavirus and commercial leases: How have things gone so far?

Corporate renters have suffered extensively because of the pandemic. Some sectors, like retail and leisure, have been the most significant victims. Several companies have implemented several practices to absorb the significant losses from COVID-19.

The most critical strategies relate to how tenants and landlords have managed leases individually. Legal advice has moved from being standard to becoming a necessity for any party looking to keep their agreements.

Aperture considerations

With lockdowns and social distancing, countless retail businesses were forced to close. For contracts demanding tenants to remain open, force majeure clauses have provided substantial advantages in these cases.

If these clauses aren't part of your agreement, staying open becomes a primary challenge. In these scenarios, landlords can leverage damage compensation for failing to honor the contract. However, this strategy is still considered problematic.

Lease charges

In most cases, rent is still a primary obligation for tenants, and that’s the same with paying for essential services. However, governments have taken measures to keep landlords from leveraging forfeitures, often preferring to request post-pandemic compensation and additional agreements.

That hasn't meant landlords have to cover all expenses during the pandemic. Tenants are usually expected to pay rent for as long as they're able. Luckily, most governments have given ground for leases to remain subjected to landlord-tenant agreements, letting them find a good middle ground for both.

Tenant inability for payments

That leads us to rent payments specifically. Multiple legal clauses have stood in the way both for government measures and traditional procedures. For many agreements, not paying rent still makes it possible for landlords to oppose renewing leases.

Good preparation has become crucial for property managers who managed to weather the storm. For instance, initial deposits have allowed landlords to absorb many costs when tenants cannot pay for their rent. Another standard agreement is for tenants to absorb unpaid rent as debt.

Insurances

Finally, insurance policies have also changed the outcomes for any tenants. Many contracts have insurance clauses other than force majeure. Mitigation, general liability, and business interruption policies have enabled tenants to keep their leases during the worst times.

However, it's essential to assess whether COVID-19 is eligible for said clauses. Enforced closure could be considered a force majeure instance, but viruses and health crises could be arguable. "Act of God" clauses aren't considerably uncommon, so that it could provide relief for some cases.

Official advisory for the sector

Official advice has been one of the main advantages for many unprepared property managers. Different entities, like the CBRE, have provided vital recommendations for landlords and tenants.

Naturally, many of these resources repeat the same advice, and that's for a good reason. No one's better informed about government measures than official entities. Additionally, many governments have called for landlord-tenant agreements, looking to appeal to reason while keeping regulations minimum.

Service interruption

Service clauses within leases usually focus on essential services from landlords for tenants. Typically, these clauses help tenants offset abatement options from landlords since they earn the same right if these services aren’t provided.

It's also important to note whether these faults occur within a landlord's control. If that's the case, and the agreement covers the fault, rent abatement could be a necessary right. We still need to consider whether our lease covers these cases. Legal advice will often prove invaluable.

Casualties

In commercial real estate, casualty clauses have been particularly influential when the cause behind any damage could be attributed to COVID-19 or related regulations. These clauses typically entitle tenants to remedies when the building becomes unusable.

The fundamental consideration in this scenario is that these clauses usually cover physical damage. COVID-19 and its inclusion in casualty clauses are still debatable because of how unique the crisis has been.

Condemnation

Condemnation clauses are among the most curious elements during COVID-19 because they address government control over the lease's premises. In many cases, government measures could make it into condemnation.

The language used by the COVID-19 regulations could be considered. However, the full extent of these benefits will likely not be applicable. It could make tenants eligible for government compensation but not rent abatement and benefits from the landlord.

Force majeure

Finally, force majeure clauses have been the primary lifesaver for many lease agreements. It essentially refers to “greater forces” that could hinder any party’s ability to meet the agreement’s expectations.

Commonly, force majeure clauses pertain to earthquakes and similar natural disasters; these cause considerable damage and are often unavoidable. However, COVID-19 has been eligible for certain force majeure instances depending on how the contract specifies things.

Key considerations

When thinking about whether these measures are applicable, landlords and tenants need to consider several issues related to their applicability. Firstly, the premises' usability requires assessment. If access is possible and the tenant refuses not to use it, several clauses won't be applicable.

The same holds for essential services and damage to the installations. If the landlord still provides all the services, it could be more challenging for tenants to leverage clauses. Force majeure clauses could depend on physical damage suffered by the property as well.

However, do keep in mind any clause that mentions or could include governmental action. Those could protect one or both parties from lockdowns, curfews, and other regulations.

The pandemic’s year: What has transcurred?

It’s been one year since COVID-19 became a global pandemic, and it has brought countless surprises. Easily, rent reduction requests and decisions have been a staple during the crisis. Countless tenants haven't been able to pay their rent.

Rent reduction has been a rare measure during the pandemic, especially regarding government measures. The most common aids have included rent moratoriums and rent relief funds. However, tenants and landlords have been expected to meet their responsibilities as long as they can.

Lockdowns

Lockdowns have been around for almost as long as the pandemic. They’ve lessened and strengthened depending on how each country has endured the pandemic.

Additionally, this measure has been the most prominent damage source for businesses. Not being able to take clients often proved more detrimental than the virus for the financial landscape.

Exceptional cases

The global pandemic and government safety measures have defied legal advisors and lease agreements. Since countless commercial tenants can’t pay rent, original contracts require more attention than ever.

In most cases, courts have agreed that the pandemic, particularly government measures, constitutes a force majeure situation. Therefore, both parties usually benefit from these clauses, yet exceptions are plentiful.

Official subsidies

Finally, government aid has been vital for many businesses and landlords, especially in the retail and hospitality sectors. These markets were the most prominent victims of the pandemic.

Rent relief has varied extensively depending on the region. Some states provide rent relief if tenants can’t meet the expectations, and others have absorbed part of the rent, often demanding landlords and tenants to cover the rest.

Restrictions’ extensions in the UK: What do they mean?

Finally, the crisis has shown signs of slowing down, mainly due to the vaccine's development. Consequently, governments have started to ease restrictions. These developments have been crucial for raising hopes for recovery.

However, the UK has taken a somewhat different approach. Instead of slowly removing regulations, it has decided to extend its restrictions for landlords. This decision essentially aims to protect tenants from evictions.

Let's see what they've done and what we can learn from them—especially if other regions start doing the same. If you're unsure of the best countermeasure, make sure to work with a professional strategy and leadership service to curb the damage.

Strengthening regulations

The most noticeable measure is extending the eviction moratoriums for a few months. However, that’s only for not paying rent.

Other contract breaches can still entitle landlords to evict tenants. However, tenants will retain the right to remedy said breaches before eviction.

The CRAR procedure

Commercial Rent Arrears Recovery entitles landlords to issue notices demanding tenants to pay rent debt. Otherwise, the landlord can seize their assets as compensation.

However, the government measures have included the restriction of this right’s threshold. That means landlords will have to wait considerably longer before leveraging it.

Statutory demand restrictions

Finally, statutory demands haven't been announced for an extension, but they'll likely follow the other measures.

The UK is expected to bring back statutory demands at the end of March, yet an extension until June is likely. The main concern behind this (and other measures) is how tenants could abuse these restrictions, considerably slowing down recovery.