Most commercial leases do not include provisions that would release you from paying rent due to events like a pandemic and the economic turbulence we are seeing now. Technically, in most cases, you will be legally required to perform under your lease by paying rent.
But in navigating that duty, you have a range of some options, some which carry greater risk than others, as discussed below.
Can I tell my landlord I will not be paying rent on my commercial lease?
You have probably heard of some companies who have gone a “rent strike.” For example, the Cheesecake Factory informed the landlords of its 190 locations that it would not pay rent for April.
While this may seem proactive, aggressive and effective, it actually presents some serious risks.
BREACH OF LEASE: First, if you decide to tell your Landlord that you will not be paying rent on time, or at all, you will likely immediately be in breach of each lease agreement as soon as you send the letter, even if you have not actually missed the payment date yet. You do not have to actually miss the payment to be in breach. Simply notifying the Landlord that you will not pay rent will automatically constitute a breach.
If a Landlord initiates legal action, a court will also likely agree with the Landlord that you are in breach. It is extremely rare that commercial leases provide you with a justification for not paying or withholding rent. In fact, we have never seen any restaurant lease that gives the Tenant with a right to withhold rent payment in situations such as this. And, in our opinion, a Landlord would likely never agree to such language.
ACCELERATION OF RENT: In many cases, upon a breach, leases give Landlords the right (but not the obligation) to accelerate rent for the remainder of the lease term. For example, if you have a lease with 7 years remaining, and the monthly rent is $10,000 per month, you could immediately be on the hook for $840,000 all at once. Again, you could be liable for this immediately once you send the letter (not when you actually miss the rent payment deadline).
This means that if you send one of these letters to each Landlord, you could, in the aggregate, be looking at potential liability in the millions of dollars, with little recourse or defense. Ultimately, we cannot predict what they will do – that decision is solely in their hands. Regardless, this is a major risk that we need to account for and consider very carefully.
PERSONAL GUARANTIES: Most commercial leases include a personal guaranty from an owner of the company. This means that you could be facing personal liability for the accelerated rent and breach of the lease. If the landlords determine that you are in breach (which they will) and then decide to exercise their rights under the lease (which we don’t know), this could have a significant impact on your personal financial interests, including your personal assets, your future lending ability, your credit, etc.
Does COVID-19 count as a “force majeure event”?
A Force Majeure clause addresses situations in which one party is prevented or delayed from performing their contractual obligations due to unforeseeable events outside their reasonable control; for example, because of an act of god, restrictive governmental laws or regulations, inability to procure materials, or other similar reasons, then your performance will be excused, but only for the period of the delay.
Unfortunately, not all commercial leases include a “force majeure” clause. And, most don’t excuse or delay your obligation to pay rent or allow you to back out of a lease. In fact, many force majeure clauses explicitly state that the force majeure event does not justify withholding rent or delaying rental payments.
If your lease does include a force majeure clause, the COVID-19 situation may constitute a force majeure event depending on how it evolves and how long it lasts. Ultimately, this will depend on the facts and wording of the clause. The provision might provide you with a possible way to delay and extend the time frame to perform. Courts usually interpret force majeure provisions very narrowly and strictly, so it is important that you do not deviate from the strict language of the clause without first consulting an attorney. For these reasons, we recommend not relying on a “force majeure” provision as a justification for backing out of the lease or withholding rent.
Will my Landlord give me a break on my rent payment under these circumstances?
Maybe. You have no way of knowing what the landlords will do. Again, just because these landlords have these rights, it does not mean that they will enforce them (only that they could if they want to). This is a risk you must be willing to take prior to making this decision.
Candidly, we expect that there will be some landlords who simply do not care and will expect you to pay rent on time regardless of the circumstances. These landlords might be willing to sue you, and it is highly likely that you will not have any available defenses to their claims of breach (and could lose the lawsuit). Depending on the number of leases you have, this could mean potentially hundreds of thousands or millions of dollars in liability, in addition to hundreds of thousands of dollars in attorneys’ fees to pay litigation attorneys (and perhaps their attorneys as well, if you lose the lawsuit). You likely will not have any available coverage under your insurance policies to protect you in the event of a lawsuit (insurance policies typically do not cover a tenant for losses when the tenant is withholding rent without a contractual justification).
On the other hand, we expect that there may be some landlords who understand the reality of the situation and are willing to work with you.
As we discuss below, consider that they might be less willing to negotiate if you simply send them a letter unilaterally stating that you are not going to pay rent, when you have no contractual right to withhold. Instead, they might be more receptive to an open invitation to discuss such as, “We are suffering financially and concerned about closing down temporarily, can you work with us on a solution? We are all in this together.” Remember at the heart of any agreement is a personal relationship with reasonable people looking for solutions. Consider one or both of the options below.
OPTION 1 – Softer Approach – Ask Landlord to Work with You.
If you are not comfortable with sending a letter stating that you will not pay on time after considering the risks described above, you can adopt a softer, alternative approach. This would include reaching out to the landlords and letting them know about your concerns. Simply ask them to work with you on a solution that provides some temporary relief that will be paid back at a later date. This way, you do not risk being in immediate and automatic breach as soon as you send the letter. Instead of saying “We are not paying rent,” say, “We are seriously struggling and we intend to comply with the lease, but can you work with us on some relief?”
Approach the landlord and very tactfully explain the situation and how the global epidemic has impacted your business from a financial standpoint. Ask for a 90-120 day (or more) freeze on everything and see if the Landlord is willing to agree. After the freeze is over, we re-assess.
You could offer to pay additional rent amounts tacked on to the end of the lease term. In other words, if a lease is set to expire on April 1, 2024, and you Blue asked for a month forbearance, they would now extend the lease term to May 1, 2024 to make up for rent not paid in April 2020. Alternatively, you could fold the unpaid rent into increased rent payments after the conclusion of the freeze.
OPTION 2 – Only Reach Out to Some, Not All Landlords.
If you have multiple leases, conduct an internal evaluation of which locations require the most support, and which locations can afford to pay an additional month’s rent. This way you can mitigate the potential impact of breaching leases across a few locations, instead of all locations. In other words, for now, continue to normally pay rent for those locations that are the most successful and reach out only to the landlords for those locations that are struggling the most.
Loans through the CARES Act
Funds received through a CARES Act loan may be used for rent payments. If you intend to apply for one of these loans, inform your landlord, and request your rent payment be delayed until funds are received.