Commercial Requests for Rent Relief Due to COVID-19
/Update on COVID-19 Orders and Legislation Affecting Commercial Landlords and Tenants.
By: Whitny L. Norton
On April 2, 2020, Governor Inslee extended the “stay home, stay healthy” order to May 4, 2020. No business pass or credentialing program is required for businesses to continue operating; however, violators may be subject to criminal penalties. Click here for a list of businesses deemed essential. The list was last updated on March 31, 2020. If you are unsure about the status of your business, you can fill out this form to receive a direct answer from Washington State’s Coronavirus Response.
Congress recently passed stimulus legislation known as the Coronavirus Aid, Relief, and Economic Security Act, which includes the Paycheck Protection Program (“PPP”) and expanded SBA Economic Injury Disaster Loan Program (“EIDL”). A business can apply for both forms of relief. EIDL provides up to $10,000 to businesses impacted by the Coronavirus pandemic, which is essentially a grant. The application process only takes about five minutes; you can access the application for EIDL here. PPP provides up to $10,000,000. This program has a built-in feature for those who qualify. Qualified applicants must utilize at least 75% of the loan on payroll and payroll-related costs. Businesses can request a PPP loan through the lender of their choice. Not all financial institutions are participating, but you should start with the financial institution you currently have a relationship with to better expedite and streamline the application process.
On March 23, 2020, Spokane Mayor Nadine Woodward signed an Executive Declaration ordering a moratorium on residential and commercial evictions through April 30, 2020 in the city of Spokane. Landlords are prohibited from issuing notices of termination or acting on any termination notice unless the termination action is based upon acts by the tenant constituting an imminent threat of damage to the property or to the health or safety of neighbors, the landlord, commercial lessor, or the tenant’s or landlord’s household members. In addition, landlords are prohibited from imposing late fees or other charges due to late payment of rent.
On April 7, 2020, Greater Spokane Incorporated announced that it is facilitating applications of a new small business COVID-19 relief program known as the Working Washington Small Business Emergency Grant (“WWSBEG”). Qualifying businesses may obtain a grant up to $10,000. For more information and to download the application, please visit the Washington State Department of Commerce’s website here.
Commercial Rent Relief Considerations and Options.
With more and more businesses experiencing the impact of the Coronavirus pandemic, we expect a continued and constant uptick in the number of businesses requesting rent relief. Before requesting rent relief and upon receipt of a rent relief request, it is imperative for both landlord and tenant to conduct their due diligence. Both parties should review the lease agreement and ask questions about the existence and applicability of any force majeure provision. “Force majeure” is French for “a superior force.” Such provisions are found in most commercial leases and apply to “Acts of God” –unforeseeable events that prevent contract performance, such as strikes, lockouts, terrorist acts, and governmental action. Typically, force majeure provisions do not apply to the payment of rent. Instead, these clauses generally excuse performance under the lease when a force majeure event occurs.
Both landlord and tenant should review their loan documents to determine what notice or permission they must first obtain from their lender before entering into a rent relief agreement. The parties should also review their insurance policies to determine whether or not any coverage is applicable and available to provide relief and support. For example, business interruption coverage or other coverages acquired specific to the party’s status as a landlord or tenant. Most business interruption policies require physical damage for coverage to apply. However, legislation has been introduced in New York, Massachusetts, New Jersey, Louisiana, Pennsylvania and Ohio that would require insurers to pay under business interruption policies if COVID-19 was the reason for the business closure. Landlords and tenants should contact both their tax advisors and legal counsel to determine the tax and legal ramifications of any proposed rent relief agreement.
There are a variety of rent relief agreements that landlords and tenants should consider and carefully choose based upon the unique situation giving rise to the request for rent relief and the underlying terms of the lease:
1. Rent Reduction – A landlord can reduce a tenant’s rent temporarily or over the term of the lease. Rent reduction should be focused on reducing the base rent, operating expenses, or both.
2. Rent Deferment – For tenants struggling to pay rent at the moment or in the near future, rent can be deferred with a promise to pay back incrementally over time in the form of increased rent, upon the receipt of a government payment (SBA loan or other CARES relief) or in a lump sum on an agreed upon date.
3. Rent Abatement – Landlords may choose to abate rent for a period of time until the tenant is able to start making regular rent payments again. Abatement is a complete relief of the obligation to pay without a request for future repayment.
4. Loan Conversion – If a tenant comes to the landlord with back rent the landlord can convert the past due rent into a loan payable over time while the tenant continues to timely pay current rent. The loan should be secured by a promissory note.
5. Lease Extension – In lieu of collecting current rent a landlord may extend the current lease term by the number of months that rent is abated to extend the time the landlord is guaranteed a tenant and to provide additional time to negotiate a new lease term or extension.
6. Security Deposit – The landlord and tenant may agree to apply the tenant’s security deposit to currently owing rent with an agreement that the tenant repay the security deposit over time or in a lump sum at a date certain in the future.
7. Lease Termination – If a tenant has been so hard hit by the COVID-19 pandemic and there is no hope at future viability then negotiate an amicable lease termination.
8. New Lease – If the current lease is completely unworkable due to the new status quo, a new lease agreement may be necessary
9. Subletting – Bringing in a new tenant for a portion or all of the leased space.
It is essential that the parties formalize their rent relief agreement in writing to ensure enforceability in the future. If the lease is longer than one year, the rent relief amendment will need to be notarized in order to be valid.
We can help. Piskel Yahne Kovarik, PLLC (“PYK”) is an experienced team of legal professionals offering, among other things, comprehensive legal representation to owners, property managers, and businesses. Available for general counsel, transactional, and litigation services, PYK primarily serves clients in the areas of commercial business litigation, construction litigation, real estate disputes, purchase and sales agreements, mergers and acquisitions, general corporate representation, financial workouts, and employment issues. Focused on building strong client relationships, we have earned our reputation as aggressive litigators and creative problem-solvers. Contact our legal team today to see how we can assist you in protecting your investment.