April 1st projects to be a historic day in the United States, as consumers and businesses are, for the first time since the COVID-19 crisis began, tasked with making regular bill payments, including the payment of rent. More than 3 million US workers filed unemployment claims during the week of March 16-20, 2020 and presumably the numbers will look similar for this week of March 23-27. Most retail businesses have closed their stores, and many service businesses remain open but without customers to serve. While Congress works on potential solutions, individuals and businesses have an immediate shortage of cash. It follows that landlords should plan for their tenants to miss the rent payments that are due on April 1, 2020.

How Should Landlords Respond?

Given that many of the courts have closed to the public and are not hearing eviction cases, as well as the fact that state legislatures have or intend to prohibit evictions during the crisis, immediate filing of an eviction lawsuit is not a presently available remedy for the landlord. When the crisis subsides and the civil courts reopen, the landlord-tenant dockets project to be slow and crowded. The Courts are likely to be sympathetic to tenants when they do reopen. It is also possible that widespread legislation is passed to prohibit certain evictions for an across the board period of time. As such, landlords are advised to work with their tenants in the short-term. That can mean taking a “wait and see” approach, where landlords ask their tenants to pay what they can while the national response to the crisis further develops, or to take a more proactive approach, and rework lease deals to benefit both parties.

OPTIONS AVAILABLE: Reworking Lease Deals

As we see it, there are four viable ways for landlords and tenants to proactively rework lease deals:

(1) Agree to terminate the lease such that the tenant can vacate the property and be relieved of any further liability. This is not an attractive option for most landlords, but it can make economic sense in cases where the landlord does not expect to collect any additional rent from the tenant. Via this option, the landlord can at least recover possession of the property and find a new tenant willing to pay rent. Some losses can be expected in the interim, but those losses may be less than the losses that will be incurred if the tenant remains in the property without paying rent and the landlord is forced to evict. Furthermore, some tenants may be willing to pay an up-front termination fee to get out of the lease.

(2) Agree to defer rent. This means the landlord will allow the tenant to skip certain rent payments, provided the tenant agrees to pay back the missed rent at a later date. For example, a landlord could allow the tenant to skip the April and May rent and then allow the missed rent to be repaid over the remainder of the lease term, i.e. with payments of deferred rent commencing to be repaid on June 1st. This projects to be the most common solution for landlords and tenants since it allows landlords to recoup all of the rent owed. The problem is that the duration of the crisis is uncertain, and many tenants may not be able to afford increased monthly payments in the wake of the crisis. So, in some cases, this may only delay an inevitable eviction.

(3) Agree to abate rent. This means the landlord will allow the tenant to skip certain rent payments, without any obligation to repay the rent. This option can make economic sense for the landlord if the landlord receives something of value in exchange. In the commercial leasing context, where rent abatements are common as part of the lease extension process, the parties can agree to extend the lease in exchange for the immediate abatement. In other words, take this pause as an opportunity to accelerate the lease extension process. The landlord benefits in that it locks up the tenant for a longer period of time, presumably at a higher rate of rent. The likelihood of an eviction in the wake of the crisis also decreases because the tenant is not obligated to pay back the rent.

(4) Agree to some combination of the above options. The options are not mutually exclusive. A combination of rent deferral, rent abatement, and/or early termination of the lease may be advantageous to all parties under certain conditions.

It is important that both landlords and tenants engage in a realistic assessment of the current economic realities in order to reach a solution that is viable for both parties.

In any of the rework scenarios described above, it is essential for landlords and tenants to reduce the agreement to writing. A written agreement is the best way to protect each party’s rights and interests, and to avoid disputes as to what the parties intended. Furthermore, verbal agreements pertaining to real estate are usually not enforceable. The lawyers at GRDD Law can assist both landlords and tenants with a lease rework agreement. Please do not hesitate to contact us if you need help with a lease issue.