Businesses that survived the unprecedented Covid-19 pandemic, which shuttered storefronts and kept customers at bay, are now looking toward the future with renewed optimism. As Covid-19 restrictions ease, brick and mortar businesses are evaluating their positions in the market.

While the empty abandoned spaces reflect the devastation of the pandemic, they also present opportunity for those businesses ready to expand. Landlords and tenants alike are welcoming the prospects of making deals, rather than undoing them through rent relief amendments and terminations, as had been the case during the past year.

The Covid-19 impacts on new leasing activity are becoming evident in the negotiation process. Both landlords and tenants are considering new risks and creating protections in reaction to the pandemic. While each lease transaction is different, there are some emerging trends.

Future rent relief

There is an interesting divide between those who want certainty and those willing to take the risk around rent relief in the event of future pandemic related restrictions (which may or may not be Covid-19 related). While some landlords and tenants are negotiating lease provisions that address alternative rent schemes in the event of future pandemic related restrictions, others are adamant about being silent on the matter. Rent relief structures mirror what we have seen in the rent relief amendments and include, abatement of rent for limited time periods coupled with lease term extensions, percentage rent in lieu of guaranteed rent for specified timeframes and deferral structures.

Many landlords are also conditioning the future rent relief structures on tenants obtaining specific insurance and taking advantage of government programs. However, because the nature and scope of future pandemics remains wholly unknown, some landlords and tenants are not willing to include any rent relief language in their leases. They believe they can get a better deal negotiating with each other if and when such an event actually occurs. If the lease is silent on future rent relief matters, it is critical to remember that relationships and open communication between the parties will be key to a positive outcome.

As-is space

The opportunity for tenants to take over abandoned space where the previous tenants vacated due to circumstances caused by the economic downturn during the Covid-19 pandemic, has resulted in many as-is deals. While as-is deals are not new, the reality is that tenants that vacated their premises (willingly or unwillingly) during the pandemic were not always able to take care that the premises were surrendered in good condition and landlords, also strapped for cash, did not follow up with repairs. Inspections of mechanical/building systems and other property conditions prior to lease execution (or with a feasibility period, if one can be negotiated) can mitigate these risks.

On the flip side, tenants may find that they have received the benefits of new quality buildouts and equipment that was simply left behind. Landlords and tenants should take steps to ensure that fixtures, furniture and equipment (FF&E) abandoned by a prior tenant are not subject to liens of third-party lenders or lessors.

CAM, force majeure, default and remedies, signage and alterations

Leases being drafted in the wake of Covid-19 are sprinkled with provisions in reaction to the pandemic. Examples of some of the issues are:

Base-year escalations or common area maintenance (CAM) caps being drafted to exclude any year in which a pandemic and related shutdowns occur.

  • Force majeure provisions being reexamined to further clarify what events are included in force majeure, remedies for force majeure and obligations excluded from the effects of force majeure (i.e., payment of rent).
  • Default and remedy provisions being scrutinized. While tenants are trying to negotiate cure provisions to protect against termination due to non-payment of rent as a result of a future pandemic, landlords are resisting such efforts.
  • Tenants making efforts to protect their exclusive use rights despite closures where such closures relate to a pandemic and landlords taking the opposite approach to provide flexibility to backfill empty spaces with tenants that may otherwise violate such exclusives.
  • Operational issues relating to signage and alterations being addressed to ensure that landlords and tenants can react quickly to unexpected circumstances and post appropriate signage/temporary banners and make alterations necessary to continued operations.
  • Bankruptcy provisions and protections, including letters of credits, being incorporated into security provisions.

Landlords and tenants have learned some hard lessons as a result of the pandemic. As businesses emerge from the shadow of Covid-19 restrictions, leases will likely begin to reflect the experiences of landlords and tenants.

Originally published in Phoenix Business Journal

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