Rent relief options for commercial leases: approaches to making a deal for landlords and tenants

The coronavirus disease 2019 (COVID-19) pandemic and resulting governmental responses, including shelter-in-place orders, have created significant hardships across the economy. The commercial leasing sector has been hit especially hard, and this has required many landlords and tenants to explore options for rent relief.

Landlords may wish to consider a number of factors before they engage in meaningful discussions for rent relief, including their own cash flow management, and the terms, if any, of their financing and equity arrangements (which may prohibit entering into rent relief agreements without at least some form of third party consent).  Granting tenants rent relief may also affect a landlord’s ability to pursue insurance claims or governmental bailout and other relief. Landlords are encouraged to consider each of these factors prior to agreeing to any rent relief package.  Additionally, landlords may wish to consider requesting tenant financials, sales reports, business plans, and other information to evaluate the scope of a tenant’s need for rent relief, as well as to estimate what the tenant’s strength may be coming out of the pandemic. On the flip side, tenants negotiating rent relief packages may expect to work closely with landlords to structure deals in a way that is closely tied to the tenant’s current and expected financial realities moving forward.

Structuring rent relief

Within this framework, landlords and tenants have a number of options in structuring rent relief.  Although the options require different levels of give and take, they can be summarized as follows: a tenant may receive some form of rent relief in exchange for “X.” Below are some examples of what “X” might look like and how the rent relief may be structured:

1. Rent deferral. While rent deferral provides tenants with immediate relief, it can place stress on a landlord’s cash flow and ability to meet debt service and other obligations.  If rent deferral is granted, a landlord has several options to structure the “pay back” of the deferral, including adding additional months to the term, amortizing the deferred rent over the remaining term or other specified period, or requiring a balloon payback at a future date.
2. Security deposit application. Depending on the size of the existing security deposit, in lieu of rent deferral, a landlord might agree to immediately apply the security deposit to the next rent payment due, while giving the tenant an extended period of time to replenish the security deposit.  Of course, this option comes with risk: if the tenant later defaults, the landlord may be left with no security deposit to apply towards its damages.
3. Requirements for the tenant to pursue insurance claims and/or governmental relief packages. Rent relief may be conditioned upon a tenant seeking any available recourse from federal and state bailout plans.  Or, the parties could contemplate a claw back of deferred rent upon the tenant’s receipt of insurance proceeds or bailout funds.  Please see our Coronavirus Resource Center for additional information and resources about a number of governmental relief programs.
4. Confidentiality. Often, a landlord will not want a tenant to disclose the terms of the relief package to any other tenants (out of concern that the other tenants may seek a similar deal). Similarly, a tenant may not want its clients, employees or the market generally to know that it has asked for or received rent relief.
5. Extension of term. Depending on the particular circumstances of a lease, it may be appropriate to consider extending the term of the lease (such as by adding one more month of lease term on the back end of a lease for each month of rent relief a tenant receives).  Of course, a landlord may be more willing to provide relief for a tenant that has years left on its term versus a tenant with a lease expiring this year.  We anticipate that a careful review of financials, guarantor strength and other typical underwriting considerations may be required by landlords considering this approach.
6. Waiver of tenant options. In exchange for rent relief, a tenant may be willing to give up an expansion option, ROFR, ROFO, exclusive use right, termination option or other tenant option, depending on the circumstances.
7. Guaranty or other lease security. When providing rent relief for leases secured by a guaranty, a landlord may wish to evaluate the strength of the guarantor or even consider renegotiating guaranty caps and/or sunsets. Alternatively, in exchange for giving rent relief, a landlord could negotiate replacing an existing security deposit with a letter of credit, or increasing the amount of an existing letter of credit. However, given the current market environment, it may be difficult for tenants to obtain new letters of credit or increase existing ones. It is also important to note that, if a tenant files for bankruptcy, letters of credit may be a landlord’s best security option, because the landlord generally has a better chance of keeping (despite bankruptcy proceedings) letter of credit proceeds than would be the case if the landlord were holding a security deposit (which can become part of the bankruptcy estate).
8. Service provider tenants. For tenants that are service providers, the tenant could, in exchange for rent relief, provide its services to the landlord at a discount. This could create a win-win scenario for the landlord and tenant, in which the tenant would receive rent relief and the landlord would receive a service at a lower cost than would have otherwise been the case.

In these difficult times, rent relief has served as a lifeline for many landlords and tenants, and can take many forms.  Landlords and tenants are urged to carefully consider the options for structuring rent relief to find the best one (or combination) for their situation. The stakes are high, as the difference between the right structure and a wrong one could mean the difference between a successful lease that continues for many years, and a failed one.

If you have any questions regarding rent relief options and their implications, please contact your DLA Piper relationship attorney, any member of the DLA Piper Leasing group, or any member of the DLA Piper Real Estate group.

Please visit our Coronavirus Resource Center and subscribe to our mailing list to receive alerts, webinar invitations and other publications to help you navigate this challenging time.

Casey Siobhani DLA Piper Partner and Head of Leasing, United States  & Stacey Ann Osmond DLA Piper Associate, United States