Although the COVID-19 pandemic has largely passed, lessons learned during it remain instructive for commercial landlords and tenants alike. We address here just a few of the issues which many landlords and tenants may not have even had on their radar before the pandemic, and which continue to deserve attention as we look to the future and the possibility of another similar public health emergency.
For landlords, it is important to take into consideration the impact a pandemic, or similar circumstance having widespread economic effect, may have on a tenant’s ability to fulfill their obligations under the lease, such as making scheduled rent payments and occupying the space. In order to mitigate potential losses, a landlord may consider requiring a tenant to obtain business interruption insurance as a condition under the lease so that if the tenant suffers a loss of business income as the result of a public health emergency, government shutdown, or otherwise, the landlord may be able collect rent from the proceeds of an insurance claim. Landlords should also be wary of “pandemic relief” provisions in leases, giving special attention to the conditions under which they become operative, and limit the remedies available to tenants under such provisions.
Tenants can reduce the economic risks associated with a pandemic or similar widespread emergency circumstances by negotiating provisions for rent abatement and the right to terminate under specified conditions. The ability to abate rent when a tenant suffers a loss of business income resulting from the effects of a pandemic may play a key role in a business surviving a pandemic. However, if a government shutdown occurs – a situation few envisioned before COVID-19 arrived – or a tenant cannot financially recover from the economic impact of a pandemic or similar circumstances, the tenant’s right to terminate the lease will become ever more important. A shorter initial lease term with a right of a renewal option at the tenant’s option is a useful tool to provide the tenant with the flexibility to avoid potential negative impacts of unknown future events.
These are just a few of the key negotiating points in the post-COVID-19 leasing market. For more information concerning commercial leasing, please contact David S. Handsman, Esq. (914-287-6126; dhandsman@bpslaw.com) or Sabrina Blefgen (914-287-6149; sblefgen@bpslaw.com).
