It is more important now than ever, to properly negotiate a commercial lease for protection when such unforeseen events such as the Covid-19 pandemic occur. The Covid-19 pandemic created much financial hardship for business owners everywhere who could not conduct business as usual due to restrictions against face-to-face meetings, in store shopping, dining, and exercising. Business owners were forced to think outside the box in order to stay afloat.
Covid-19 Taught Commercial Tenants to Have an Exit Plan
If anything, the Covid-19 pandemic revealed that an exit plan is important to have when you are a commercial tenant. Such tenants should consider negotiating an exit plan for future lease renewals in the event the Covid-19 pandemic does not go away or to protect against any future global pandemics, government actions, or public health crises that prevent businesses from operating as usual.
A commercial lease typically includes a clause about what happens if the tenant defaults on rent or violates any other section in the commercial lease agreement. Commercial tenants should negotiate this section so that it is not unduly burdensome on the tenant to cure the default in a manner that still allows the landlord to get paid.
Examples of Commercial Lease Exit Plans
The commercial lease tends to be written in a manner that benefits the landlord and restricts the tenant, which is why the lease negotiation process is so important. There are a variety of exit clauses available to a commercial tenant if properly negotiated. The hard part is convincing the landlord to agree to such exit clauses during the lease negotiation stage.
Sub-lease and Assignment Clauses
Most commercial leases that favor the landlord do not allow a commercial tenant to sub-lease or assign the rental property to another tenant. These are typically clauses that the tenant needs to negotiate. If the tenant offers to include in the clause that the tenant will assist with finding a replacement, the landlord may be more willing to agree. Both options assist the commercial tenant with an exit strategy to limit the tenant’s financial burden but also benefit the landlord. Keep in mind that the bottom line is for the landlord to be paid, whether it be by the original tenant, or a new one.
Lease Buyout or Early Termination Clause
A lease buyout is an agreement to pay the landlord a specific amount of money in order to terminate the commercial lease early. If the landlord will not agree to the lease buyout option, then an alternative would be to ask for a two-year initial term with yearly renewal options. Such a clause would provide the commercial tenant with shorter renewal periods to decide whether it makes sense to continue with the lease.
Return Unused Space Clause
The Covid-19 pandemic caused many commercial tenants to use different kinds of spaces than before due to employees working remotely, or in order to follow the social distancing guidelines. The change from employees working primarily in person to working remotely caused many commercial tenants to pay rent for an empty space, that caused a loss in profit.
Therefore, a commercial tenant may want to add a clause in the lease that allows them to “return” unused space back to the landlord to rent to a different tenant. Unfortunately, not many landlords are likely to agree to this clause based on the risk of not finding a new tenant in a global pandemic or otherwise. However, if the clause indicates the unused space would not be returned until a new tenant is found, then such a return of space clause would benefit both the landlord and tenant.
Force Majeure Clause
The force majeure clause in a commercial lease typically relieves the tenant of performing under the lease if “acts of God,” or in other words, circumstances beyond their control, prevent the tenant from running their business. It can be difficult to prove COVID-19 meets the requirements of a force majeure event because most commercial leases currently do not contain the necessary terms such as pandemic, unexpected governmental action, or government mandated business closure that would assist in asserting this clause in the event of litigation. Such terms should be inserted into this clause sooner than later.
In conclusion, the impact from the Covid-19 pandemic increased the need to carefully review and negotiate commercial leases since even a small term could mean a huge difference for the commercial tenant who needs to break their lease. Therefore, an attorney should be involved in the negotiation process to help navigate through the evolving issues that arise.
This article is intended for general information and educational purposes only and should not be considered legal advice or counsel. The substance of this article is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business. © 2021 Regina Sarkis, Esq.