Rent Deferral In the Time of COVID-19

When it comes to commercial tenants that cannot pay rent, owners need to apply empathy as well as solid legal counsel, according to Jonathan Hipp of Avison Young.
Jonathan W. Hipp  Photo courtesy of Avison Young

The COVID-19 pandemic has raised issues the likes of which we have never dealt with before. Specifically for landlords, a constant question is how to deal with requests for rent deferrals or forgiveness. While the topic itself isn’t new by any stretch of the imagination, the volume of requests and the sheer flood of such inquiries we are hearing about in the face of massive restrictions on work plunges all of us, tenants and owners alike, into uncharted waters. 

Nowhere is this truer than in the retail market, although all commercial real estate food groups are feeling the pinch. Retailers of all sizes were reduced to curbside service or totally shuttered, unless they have been blessed with the all-important label, “essential business.” 

Whatever the business type, the first rule of handling rent-deferral requests is to do so with compassion. To invoke a phrase that has become sorely overworked in the past few months, we are all in this together. 

So landlords have to deal with the issue of rent deferrals on the basis of empathy. Nevertheless, they still have to deal with it. Closely watching the market trends, there are a number of ways we have seen landlords attacking the problem. 

Three Approaches

There are essentially three patterns that we have witnessed. First, we have seen landlords grant partial or complete deferrals, with the tenant agreeing—usually in writing—to repay the cost of the deferral on an amortized basis through 2021. Second, we have seen landlords simply tack the missing rent onto the end of the tenant’s lease term.

That second approach is probably the more straightforward solution to the situation, but in both cases the landlord and the tenant should keep in mind that there is a time-cost involved with the money that is being deferred. It could be for rent plus half or possibly even double the rent, but that cost is real and it needs to be addressed. 

There is a third consideration, by the way, but it’s one that flies in the face of all that we have said about a compassionate approach. Some landlords have simply said no, essentially breaking the bond of partnership that should exist—in the best of cases—between tenant and landlord. 

No matter your approach, you will need two entities at your side. The first, obviously, is the tenant. Approaching the issue as a partnership rather than on an adversarial basis will resolve the issue much more peaceably, and more than likely with a better outcome for both. After all, as we said before, we are all in this together. 

The other entity is your legal counsel. This is especially true if the conversation is less than amicable or if the tenant invokes one particular argument: Whether it is a mom-and-pop or a national chain such as a fitness center, their closing was by government dictate. They could reasonably argue that their quiet enjoyment of the property was interrupted by the government in what amounts to a taking. They could argue for it being a force majeure situation, an argument that will send everyone scurrying back to check the original lease language. Whatever the argument, the situation has now slipped from being a business issue to a legal one. 

Yes, we are all in this together. And of course, compassion and empathy have to enter into the discussions, especially in cases of a longstanding relationship that everyone involved would prefer to continue long after the pandemic has cleared. 

But you also have a responsibility to protect your interests and those of the other investors, if such exist. That is the surest approach to answering some of the toughest questions in this incredibly difficult time.

Jonathan W. Hipp is principal & head of U.S. Net Lease Group at Avison Young.