Commercial Lease Forbearance Agreements During the COVID-19 Pandemic
Coronavirus COVID-19 has impacted businesses large and small all across the United States. Businesses of all types have suffered from the shutdowns implemented by state and local governments. One area of the economy that has particularly suffered adverse effects is commercial real estate, including the retail, office, restaurant, and hospitality sectors, among others.
Economic activity was stifled across the board during the quarantine. Having been forced to close temporarily, businesses of all types have lost substantial revenue, and in some cases, have closed for a longer term or gone out of business altogether. As a result, many commercial tenants are unable to meet their monthly rent obligations as the global pandemic continues. This is becoming more of an issue as the cases of infection explode around the country, and some states pause or even reverse their reopening timelines.
However, there are avenues to consider for both commercial landlords and tenants during the pandemic. It is often in the best interests of both commercial landlords and tenants to reach an agreement that will keep their tenants in place until regular economic activity resumes. There are different options available to facilitate this outcome, one of them being a forbearance agreement.
A forbearance agreement is an agreement between a landlord and tenant where the landlord agrees to modify the required rent payments as outlined in the lease, and also agrees to forbear, or refrain from pursuing legal remedies against a tenant for non-payment of rent, in exchange for certain guarantees from the tenant. A forbearance agreement is typically a contract signed by both parties separate from the lease agreement.
Forbearance agreements can facilitate a tenant remaining in a property long term by providing rent relief. Rent relief can come in many forms and may include a temporary or permanent rent reduction, a deferment of the rent payment(s), or a partial rent payment(s).
Practical and Financial Issues to Consider When Negotiating Lease Forbearance Agreements
When commercial landlords and their tenants come to the table to negotiate a forbearance agreement, both parties will have to keep practical and financial issues in mind as they navigate an uncertain future.
To start, landlords, among other things, should review their mortgage documents to determine whether the bank must consent to a forbearance agreement. If the bank requires consent when the parties seek to modify a lease agreement, consent will likely be required before the parties can enter into a forbearance agreement.
Before coming to any agreement, landlords should review documentation about the tenant’s financial status, including profit and loss statements, bank statements, and tax returns. These documents will show whether a tenant will be able to meet its rent obligations in the short term. Landlords should request this information periodically during the term of the forbearance agreement.
During negotiations, the parties should consider whether the tenant is eligible for, or has already received, government relief from programs such as the CARES Act or the Paycheck Protection Program. In these instances, the parties may choose to have the forbearance agreement begin after the loan period is complete. In other instances, landlords may consider having their tenants forward any loan financing received directly to the Landlord specifically for rent payments.
It is also reasonable to ask the principals of the tenant to sign a personal guaranty of the lease, if they haven’t done so already. Having them personally guarantee the obligation will often aid collection efforts significantly, even if it is limited only to payments under the forbearance agreement.
Landlords should also consider whether they will be able to find another tenant if they decide to forego a forbearance agreement and evict the tenant. Indeed, it may prove challenging to do so as the number of cases of COVID-19 continue to rise throughout South Carolina. Finally, Landlords should specifically obtain legal counsel before deciding to evict to ensure that they are not violating the CARES Act eviction moratorium and are complying with the notice requirements of the CARES Act.
Contact Crawford & Von Keller, LLC, to Discuss Your Commercial Lease Forbearance Agreement.
Before commencing your negotiations regarding a commercial lease forbearance agreement during COVID-19, contact the attorneys at Crawford & Von Keller, LLC to fully understand the practical and financial issues involved in a lease forbearance agreement.
Contact us now to schedule a consultation. We can be reached by calling (803) 790-2626 or by filling out a contact form online.