Walldorf's Guidelines for Landlords and Tenants on Rent Relief due to the Coronavirus Shut-Down
In the fight to defeat the Covid-19 pandemic, businesses have limited operations or shut down completely to reduce the spread of the disease. Slowed or shut down businesses are experiencing serious cash flow issues, inhibiting their ability to pay rent and risking their existence. Cash flow issues for tenants very quickly become cash flow issues for landlords. If tenants cannot pay rent, landlords cannot pay mortgages.
These guidelines are intended to offer guidance for developing methods to deal with those issues and outlining policies underlying those methods for both landlords and tenants.
1. Recognize the landlord/tenant partnership.
To some degree, landlords and tenants are partners, both in the tenant’s business and the landlord’s real estate. At some level, every landlord invests in every one of her tenants’ businesses, and every tenant invests in his landlord’s real estate. The landlord cannot succeed with failing tenants. Similarly, the tenant’s business is inhibited if tied to a failing property with a failing landlord.
In the coming months, tenants may face a real threat of closing, and landlords may face a real threat of foreclosure. Both threats may be mitigated by landlords and tenants recognizing the need for cooperation. This partnership is fundamental to the other points in this document.
2. Communicate now.
Tenants, do not put off calling your landlord until you figure something out. Enlist her help in addressing any issues you might have. Let her know your strategy to address those issues. And if you have no issues arising from current protocols, let her know that regular rent will not be a problem.
Landlords, do not wait to hear from your tenants. Contact them now and ask how they are doing. Do not assume that they are failing nor that they are fine.
Continue to communicate until restrictions required by Covid-19 are lifted. The success of any plan depends on clear and consistent communication.
3. CARES relief can benefit both landlords and tenants.
Last Friday, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act is designed to preserve jobs by helping businesses survive the shutdown and retain their employees. Starting Friday, April 3, the act will pump $2.2 Trillion into the economy and will get money to businesses in the form of forgivable, low interest loans with no fees, no personal guaranties, and no prepayment penalties. Subject to some conditions, CARES Act loans can be forgiven in amounts equal to borrowers’ payroll, rent, utility, and mortgage interest payments.
This program should benefit many tenants, allowing them to make otherwise difficult rent and utility payments and to keep their employees, thus allowing them to reopen quickly when social distancing protocols are eased. This program should benefit many landlords through CARES-enabled rent payments from tenants with shuttered businesses, and also through qualified forgiveness of payments for mortgage interest, payroll, utility, and rent.
Though the CARES Act is unlikely to get money into the hands of anyone in time to make a difference for payments due in early April, the program is retroactive to February 15, and may allow retroactive forgiveness for qualifying payments made in March. Landlords should pursue CARES Act relief for themselves and encourage their tenants to do so, and vice versa. Banks will administer the CARES Act program. Landlords and tenants should contact their bankers right away to pursue CARES Act relief.
4. Rent relief and the elements of a plan.
A rent relief plan can help tenants bridge the gap until receiving CARES Act funds, or if they do not receive such funds, until social distancing is no longer required. Landlords can use rent relief to minimize tenant closures and the resulting vacancies.
There are two fundamental elements to most rent relief plans: rent deferral and rent recapture. Both require agreement on amounts and timing. On deferral, how much rent will be deferred and for how long? On recapture, how will deferred rent be paid and when?
a. Deferral. Rent deferral may be in whole or in part depending on the cash flow circumstances of the landlord and the tenant. Some landlords are deferring 100% of rent for one or two months, or deferring a portion of rent for longer periods, like 50% for four months. An effective plan might also consider a reduction declining over time, for example, deferring 100% of rent in April, 67% in May, and 33% in June.
b. Recapture. Most plans recapture rent either through increased payments for some defined period following deferral or through an extended lease term. For example, deferring 50% of rent for 4 months might mean increasing rent 125% for 8 months, or it might mean extending the lease term two or three months. Similarly, deferring 100% of the rent for two months might result in the same recapture options.
5. Standardized or custom relief plans?
Landlords with multiple tenants may benefit from having a standard plan in place for all tenants, but a rigid standardized plan may not work for all tenants. A standard plan can streamline the negotiation process by establishing a basic approach that can be tailored to meet specific tenant needs.
Larger developments may need various standardized plans for categories of tenants. For example, in a given multi-use development, office tenants may need a plan different from the plan for restaurants in the same building.
Tenants should do what they can to work within a landlord’s standardized framework to minimize administrative headaches for landlords, especially those landlords with a large number of tenants. Likewise, landlords should do what they can to tailor standardized plans to meet the specific needs of tenants for whom some elements of a standardized plan may not work.
6. Consider the long term.
Neither tenants nor landlords want to have to negotiate every month until the pandemic is over. Develop a plan that will work beyond the end of social distancing protocols to a time when some normalcy has returned.
The CARES Act is structured to help through June 30. Realize that it may take longer for certain businesses to get back to something recognizable as normal. The plan should contemplate that horizon from the beginning, and as noted in the previous paragraph, that horizon might be different for different tenants.
Longer plans may need to provide landlords some payment to cover hard costs like building services, repairs, utilities, etc., that rent usually covers. Deferring 80% percent of the rent for a longer period may meet the cash flow needs of both landlord and tenant.
7. Maintain confidentiality.
Generally, tenants should keep the terms of their plan confidential and refrain from discussing them with other tenants in their building. Again, even within a standard framework, different tenants may require different solutions, and if a certain plan works for a certain tenant, it should not matter what another tenant gets from the same landlord even in the same building. There are many factors at play, and those factors may affect each situation differently.
8. Define contingencies.
A plan might include contingencies that address certain situations, but contingencies need to be specific, measurable, and objective with a clear timeline for their start, milestones, and stop. For example, if a tenant’s business will run at 25% of its typical revenue until the general population is back at work, the plan could provide for 25% rent until a specific, large local employer retracts its general work-from-home directive or until the city ends its social distancing directive. The plan might also provide for its termination in whole or in part if the tenant can pay rent with loaned funds that qualify for loan forgiveness under the CARES Act.
9. Review the lease.
Make sure that each element of each relief plan is consistent with the lease.
10. Put it in writing.
A letter agreement signed by the tenant and the landlord should be fine in many cases. Be specific about exactly what is being deferred, how, and when, and what is being recaptured, how, and when. Landlords and tenants should check with their attorney before assuming a letter agreement is sufficient. A more formal lease amendment may be advisable in some circumstances.
11. Consult with your attorney.
Nothing in this document is legal advice. Landlords and tenants should consult with their attorneys and let them know what they are trying to do and how.
12. We are all in this together.
Finally, as far as coronavirus is concerned, we are all in this together, and going to experience financial stress. Both landlords and tenants need to pay their employees, vendors, and bankers just the same. Tenants pay with revenue from operations, and landlords pay with rent revenue from tenants. Tenants, do not exploit this situation to extract unneeded rent concessions.
The context for what we are all experiencing is fluid. No one knows how long we will be operating under the social-distancing protocols recently extended to April 30. As mentioned, the Treasury Department designed the CARES Act to address economic disruption through June 30 and has indicated that they will propose more if more is needed. Communication and cooperation between landlords and tenants will be key to getting through this disruption, regardless of how long it takes us to beat this pandemic and return to some normalcy.