Commercial Lease Terms: Changes to Expect Amid COVID-19

Originally published by Jeff Raizner.

Before the COVID-19 pandemic, small and large business owners and the landlords leasing to them likely had little concern over tenants would make rent payments or whether they’d be paid timely. Now, however, as many business owners continue to weigh their options for keeping a commercial lease intact, landlords are looking into how commercial lease terms can be modified during and after the pandemic to benefit themselves as well as their tenants. Understanding the potential changes to commercial lease terms can help both landlords and tenants prepare for upcoming agreements.

Potential Changes to Commercial Lease Terms

The coronavirus has impacted businesses in a way that will likely last for years to come. As many business owners continue to grapple with the decision to close their doors for a second time as cases spike anew, landlords are struggling to ensure rent payments are made in order to keep their operations afloat as well. It’s not just smaller businesses that are under fire; a growing number of large corporate chains are also proving to be either unwilling or unable to make rent payments. Because of these significant market changes, corresponding commercial lease term changes are inevitable. Potential changes to commercial leases may include:

Shorter Commercial Lease Terms

Commercial lease terms are expected to become shorter in length during as well as after the COVID-19 pandemic. In fact, within the first five months of 2020, the average office lease term decreased 15% to seven years, and will likely continue to decrease in duration. The trend towards shorter termed leases helps both tenants and landlords avoid making longer-term decisions amid coronavirus concerns and financial pressures.

Flexible Office Solutions for Existing Tenants

Office tenants have seen two recessions in the last 12 years that have resulted in reduced space needs. Since a tenant must commit to a certain amount of space configured in a specified way for a certain number of years, business owners looking to renew or extend existing leases want flexible terms and solutions rather than searching for a new space during the pandemic. Tenants seeking flexible solutions are likely extending work-from-home initiatives – and thus want to avoid longer lease commitments. In addition, the risk of returning to an office space has made it likely that once most operations are back to re-occupying an office, denser workspaces will need to be expanded to account for social distancing measures. Because of this, it is in the landlord’s best interests to allow for necessary space modifications to be made to ensure their tenants have a location in which they can safely operate.

Percentage Leases

A percentage lease is a type of lease where the tenant pays base rent plus a percentage of revenue earned while doing business on the rental premises. These leases offer a promising solution to both landlords and business owners – especially those in the hospitality industry; however, larger chains are often the best to work within these instances. In the event a restaurant chain does well one month under a percentage lease, the landlord will be able to accrue extra rent. It’s important to note percentage leases are typically only used in shorter-term intervals designed to limit what the business pays until it is able to return to greater stability. Typically, the goal with percentage leases is to phase them out over time as business conditions improve.

Disease-Prevention Protocols

Most commercial leases already detail how frequently individual offices will be cleaned; however, this is typically in relation to vacuuming, trash removal, and bathroom cleaning. Pre-pandemic commercial leases don’t typically specify the type of cleaning supplies or other disease-prevention protocols. As a result of the COVID-19 pandemic, however, tenants now know not all cleaning supplies are equal and spaces will require disinfectants periodically each day. Tenants now know the difference between cleaning, disinfecting, and sanitizing and are likely to specify protocols in their leases. Because of this, landlords should allow for leases to be more dynamic documents that incorporate the Centers for Disease Control and Prevention (CDC) guidelines and industry recommendations.

Landlords Should Review Current Tenant Lease Terms

Landlords should take the time review existing tenant leases with an eye toward provisions that might be impacted by the pandemic and its associated local government closure orders. Among these, items such as force majeure clauses, operating covenants, casualty and condemnation provisions, landlord duties for constructing the premises and operating or maintaining common areas, and the obligations of any party to mitigate damages should be thoroughly reviewed. It is likely each of these provisions will come into play during lease negotiations with tenants related to rent deferrals and may need to be addressed in any potential lease modifications.

Houston Commercial Leasing Dispute Lawyers

Commercial lease terms are likely to continue to change in the midst of and following the current pandemic in order for all sides to protect themselves. At Raizner Law, we work with business owners and landlords to protect their assets. In the event a tenant is not paying rent for space in your commercial property, and they owe you hundreds of thousands of dollars in unpaid rent payments, the attorneys at Raizner Law can help. Contact us today to see how we can assist you.

The post Commercial Lease Terms: Changes to Expect Amid COVID-19 appeared first on Raizner Slania LLP.

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