Elements of Pandemic-Era Commercial Landlord and Tenant Settlement Agreements
May 30, 2021
I have settled so many commercial landlord and tenant matters during this Pandemic year. I intended to write here about those that presented interesting stories. But the year has been so hectic and, frankly, I have worked on so many settlement agreements that they have started to mush together in my mind. Suffice it to say that I have been privileged to work with co-counsel, opposing counsel, and clients who have come up with very interesting ways to structure resolutions and to get settlements done during these trying times.
In this post, I am reviewing some optional components of Pandemic-era settlement agreements in commercial landlord and tenant matters.
- “Abatement of Arrears”. A portion of the rent is forever forgiven. Black’s Law Dictionary defines “abatement” as “nullification”. Often in a Pandemic-era settlement agreement the landlord will abate all the late fees and interest.
- “Deferment of Arrears” (a/k/a “Rent Holiday”). The arrears will not be paid now, but the arrears will be paid on some agreed upon date in the future. Black’s Law Dictionary defines “deferment” as “delay or postponement”. Usually when the landlord agrees to defer the rent due, time gets tacked on to the term of the lease.
- “Arrears Held in Abeyance Pending Tenant Compliance with Deal” (a/k/a “Conditional Abatement”). Here, landlord is cutting tenant a break on the arrears. But the unpaid portion of the arrears is held in abeyance, unless and until tenant defaults on the terms of the settlement deal in the future. Black’s Law Dictionary defines “abeyance” as “temporary inactivity”.
- In an interesting and oft used hybrid of this method, the arrears-held-in-abeyance typically decrease as tenant complies with the deal over time. The longer the tenant complies, the more the arrears decrease.
- I really like this method of settling a Pandemic-era rent default. Most landlords understand that they need to share the burden of the Pandemic with their tenants, or the tenant’s business will not survive, and the landlord will have empty space to fill. But no landlord wishes to give a large abatement (i.e., to permanently forgive a large amount of rent) if the tenant is just going to turn around five minutes after the abatement gift and default all over again. The landlord prefers to hold the arrears over the tenant’s head in a conditional manner, to ensure tenant compliance. From the tenant’s point of view, however, the tenant usually already has a great deal of incentive to survive. Most tenants have struggled mightily during the Pandemic to do so, often investing their own money into their businesses. Therefore, to a tenant it is no settlement at all to keep moving forward if landlord is not going to, eventually, fully abate a portion of the arrears. The “abeyance” method satisfies both parties’ needs. The landlord gets to use the arrears as leverage. But that leverage decreases over time, as the tenant continues to comply with the settlement agreement, and hopefully, as the world normalizes.
- Temporary Prospective Rent Reduction. In addition to dealing with arrears, many commercial landlords are willing to give a period, typically through 2021 or the Spring of 2022, of reduced base rent. What I have seen very little of is rent reductions radiating far into the future. No one is sure about what the market will do. Rent reductions generally do not apply to additional rent, such as real estate tax escalations. I have, however, seen a handful of landlords willing to renegotiate the base tax year with tenants, which often provided much needed relief.
- Guarantors. When the terms of a lease change, the personal guarantors need to ratify the new deal and agree that the guaranty extends to the new terms, signing personally in front of a notary. In this Pandemic-era I have seen guarantors swapped out for new guarantors and guarantors added. Obviously, this is another way to increase the comfort of the landlord with the deal. Sometimes the guaranties are for the rest of the term and sometimes just for the payment of deferred arrears. Only tenants who are confident of their ability to meet the terms of the settlement should offer up a personal guaranty of their principals.