Why Commercial Landlords Need To Rethink 10-Year Leases

Originally published by Jeff Raizner.

Commercial landlords have faced many challenges since the COVID-19 pandemic began last year, such as, grappling with tenants over unpaid rent and the need to develop strategic measures for tenants returning to the office or business for work. Now, commercial landlords are shifting towards forgoing or reevaluating the need for 10-year leases, as tenants begin to shift back towards in-person work.

10-Year Commercial Leases After COVID-19

A recent survey was taken of 164 commercial landlords and senior real estate executives, who own and control over 7.1 billion square feet of office space across the country. The survey revealed 39% of landlords do not believe the formerly popular 10-year lease will remain an industry fixture moving forward.

Industry professionals believe the change is due to the rise in popularity of e-commerce and the newfound flexibility offered by coworking spaces. Both elements were already a cause for concern for commercial landlords before the pandemic hit. However, the impact of COVID-19 accelerated these changes, with many tenants working from home instead of in an office.

Due to the ongoing changes to work environments, commercial property owners believe tenants will be more attracted to flexible lease terms. The survey revealed, 57% of landlords believe coworking companies will remain relevant to commercial tenants 10 years in the future.

It’s not only coworking spaces that provide flexible lease terms; subleases also afford tenants much shorter terms than 10 years. Additionally, more and more traditional landlords have begun offering 3 to 5-year lease terms as tenants begin to return to the office.

Commercial landlords largely agree with their tenants that the future of office workspace will involve hybrid work schedules, with 82% of survey respondents believing employees will only want to work from the office a few days a week. Despite this, none of the landlords surveyed anticipate their tenants will ditch office space altogether.

Commercial Landlords Continue to Clash With Tenants Despite Lease Changes

While many commercial landlords have made attempts to modify leases and/or offer rent forbearance and reductions to tenants, it is likely they will continue to struggle even as more tenants return to their offices. Many landlords anticipate tenants will attempt to fight terms from the original lease citing force majeure clauses.

Force majeure clauses allow contracting parties to be freed from some or all of their contractual obligations in the event of an unforeseen circumstance that makes it physically or economically impossible for the agreement to be carried out. This typically includes natural disasters or human actions like war or labor strikes. Since the pandemic began, many commercial tenants have argued the pandemic qualifies as a force majeure event. Many such disputes likely relate to the nonpayment of rent.

Ultimately, whether or not a party can invoke force majeure will depend on the language of the commercial lease and whether or not COVID-19 falls within the scope of a lease’s force majeure clause. Therefore, force majeure events and COVID-19 should be considered on a case-by-case basis.

Its also important to remember that while commercial landlords are often thought of as massive corporations, in many cases they are actually small operations. The tenants are often large, brand-name entities that wield enormous power over smaller landlords. These large companies can spread losses and legal expenses over massive portfolios, while their landlords don’t have that luxury. Because of this, commercial landlords should take the time to consult with an experienced commercial lease dispute attorney.

Texas Commercial Lease Dispute Attorneys

At Raizner Law, we understand just how difficult the ongoing pandemic has been for commercial landlords. As landlords continue to adapt by offering adjusted lease terms as well as by making adjustments to office spaces, it is likely tenants will still attempt to find ways to forgo paying rent. If you are a commercial landlord struggling to collect rent from a large national tenant, you could be entitled to financial compensation. Contact the attorneys at Raizner Law today to discuss your case.

The post Why Commercial Landlords Need To Rethink 10-Year Leases appeared first on Raizner Slania LLP.

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