Many businesses have suffered under the current COVID-19 crisis, including commercial landlords, who are experiencing the loss of income, as well as numerous requests for rent reduction or abatement from their tenants. While is it wise for the parties to work together at this time, landlords have many factors to consider,such as paying contractors servicing the leased property, and the landlord's ability to service any loans on the property.
While there is no magic pill for all commercial leases, the obvious solutions are, full or partial rent abatement, rent deferral or a combination of both.
Full or Partial Rent Abatement - The parties may agree upon a temporary rent abatement, which may range anywhere from a full abatement of all rent and obligations due under the lease, to a partial abatement of base rent only. While the landlord will need to ensure that its basic costs are covered, and push for a fixed end date, the tenant should push for as much discretion as possible to determine when the temporary rent abatement period should end; such as, for example, rent resumes upon re-opening of tenant's business., Another, more simplistic form of abatement would be to revisit the temporary rent abatement on a monthly basis.
Rent Deferral - Rather than providing for rent abatement, the parties may agree simply to defer rent, by providing the tenant with a full or temporary rent deferral for a period of time, with the tenant being responsible for repaying any deferred amounts later. For example, under rent deferral, the tenant may be required to pay back the deferred rent in equal installments in addition to the normal rent obligations as they come due each month. Other solutions, such as a combination of rent abatement and deferral and/or requiring the tenant to provide additional security, and a corporate or personal guaranty for smaller businesses.
Finally, there is always lease termination, but that generally favors the tenant more than the landlord. Again, it is important to remember that each situation is different. While North Carolina law is available to interpret the provisions of any particular lease, the landlord should consult with his or her attorney to determine which solution fits best.
While the Landlord Tenant Act, codified at Chapter 42 of the North Carolina General Statutes, covers residential leases, there is no equivalent for commercial leases. Rather, parties to a commercial lease are deemed to be sophisticated persons or entities that are able to negotiate with one another at arms-length. Thus, by and large, the lease between them comprises the entirety of the deal. Additionally, the concepts of the North Carolina common law of contracts generally apply to these leases.
Tenants seeking rent deferral or reduction should not assume that landlords are required to accommodate their requests, and they should be prepared to explain why it is needed and what measures they have taken to address their difficulties. On the other hand, landlords need to consider the long-term ramifications of the COVID-19 crisis, and their response to it, on their tenants. If needed, they should reach out to their lenders to see what options may be available for a comprehensive solution. Regardless, it always "best practice" to reduce any agreement to modify a lease to a signed memorandum drafted to memorialize the parties' intentions and to avoid any future confusion. Overall, it is important to remember that the success of the landlords and the tenants are not separate but joined. Regardless, the legal issues created by the current crisis are unique and should involve consultation with an attorney.
Please contact us with any questions. The current COVID-19 crisis has created a lot of confusion, but together we can overcome this troubling time.
Author: Ted F. Mitchell, Attorney The McIntosh Law Firm, P.C.
In this webinar, we discuss the Paycheck Protection Plan SBA 7(A) loans along with new guidance just received from the Treasury Department. The most important point is YOU DO NOT HAVE TO PAY EITHER THE BANK OR THE FIRM TO HELP YOU WITH THESE LOANS. The program prohibits fees to be paid by the borrower for these services. The federal government is reimbursing both the bank and the agent for the fees.
Here is an overview of the program:
Here is the information you need as a borrower:
Here is the information you need as a lender:
And here is the application:
Remember, obtaining the loan is only half of the battle. The other half is compliance with the SBA process to have it forgiven. We can assist you in this process as well. These services will be under separate representation and separate fee schedule. They are not part of the application process or representation, and we cannot guarantee that the loan will be forgiven, but we can assist you in the process to ensure understanding of and compliance with the requirements as the SBA states them. The final decision lies with the SBA, but we can be your compliance department in that process.
Please let us know if you need any help with this process and we will step in as your agent to make the application process as simple as possible with your lending institution.
For the next several months, we will be dealing with extraordinary circumstances. While we let the experts address the public health issues, it is vital that small businesses act now to make sure they are in a position to weather this potential storm. Here are five quick ways you can make sure you and your business are prepared for the potential drop off in revenue and come out stronger on the other end.
1. MAKE SURE YOUR BUSINESS CONTINUES: Now is the time to make sure you and your business survive. If you delay, you risk losing options that could have been available to you had you acted sooner. We urge you to assess your current situation now and determine if you can survive the next three to four months with little to no revenue. If no, are there new sources of revenue or cash flow? If no, then what?
2. MAKE A DETERMINATION OF STAFFING LEVELS: Sometimes we as business owners have to make unfortunate but necessary decisions. If your cash flow can sustain current staff levels for four to six months, then you should be in a strong position. If not, then you need to make the difficult decision as to which staff will be essential for you to re-emerge a strong business. Then you can advise others that they should apply for unemployment to help meet their financial needs until such a time they can be brought back to work. Unemployment insurance is there for that specific reason. Help them apply and get them set-up.
3. ASSESS YOUR CURRENT CASH FLOW AND RESERVES: Most small businesses do not operate with a significant amount of cash reserves. Almost 40% of employees operate with less than $400 in savings and businesses are no different. If your cash flow situation is sound and you have reserves, you should be fine. If not, then you need to consider immediate action.
4. DISCUSS LOAN AND RENT OPTIONS WITH BANKS AND LANDLORDS: If you are making payments on debt or have a rent payment, NOW is the time to discuss a plan to make arrangements with these entities to help offset the cost and save as much cash as possible to maintain your staff. These accommodations are possible by having conversations with your landlord, suppliers, vendors and other creditors at times resulting in an amended lease or additional security on your equipment, inventory, etc. If you are a landlord and have an operating loan on your building, you can tap into existing equity to expand a credit line or refinance with a credit line to allow yourself cash reserves to pay employees and let tenants pay their essential staff.
5. SBA EMERGENCY LOANS: These loans through the SBA are now available. You can apply now to get in line for funding which should be available soon. Get yourself prepared in case you need that option and no other traditional banking options exist.
What is most important is that our small businesses survive. If our small businesses survive then our economy will recover relatively quickly. If not, then we face an extended recessionary period or worse, the situation could escalate. We are here to help and can connect you with funding options if necessary. Think outside the box and work together with your business partners to improve and maintain your good business relationships. We are truly in this together.
During this time of crisis in our country, it is imperative that small businesses come together to support one another. We must find the most efficient and effective tools for overcoming this pandemic in order to continue to provide services to our community. In light of this necessity, we at The McIntosh Law Firm have compiled a list of resources and fact sheets pertaining to the Coronavirus.
The topics include economic impact, as well as specific tools and resources available to help small businesses survive in this time of economic distress and uncertainty.
We hope that these resources will be helpful to our small business leaders. If The
McIntosh Law Firm can be of any assistance to each of you personally, or to the small businesses that our community relies on, please do not hesitate to reach out to us.
NC Golden LEAF NC COVID-19 Rapid Recovery Loan Program:
NC Restaurant and Lodging Association Resources for Small Businesses:
NCRLA Small Business/COVID-19 FAQs:
US Chamber of Commerce Website:
US Chamber of Commerce Emergency Tool Kit:
US Chamber's Policy Proposals:
US Chamber's Policy Tracker:
SCORE total resources:
SCORE Crisis Communication Planning Checklist
SCORE's COVID-19 Economic Impact Options
SCORE How Small Businesses Can Prepare for Coronavirus
CDC Small Business Resources:
NC Department of Public Safety Business Recovery Resources:
SBA Small Business Guidance:
FEMA COVID-19 Eligible Assistance:
NC SBTDC COVID-19
OSHA Guidelines for COVID-19