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How COVID-19 will have a lasting effect on commercial leases

Lease signing

How COVID-19 will have a lasting effect on commercial leases

By Drew Anderson, Partner

There’s no question that COVID-19 has affected businesses across industries in ways we couldn’t have imagined only a few months ago, and as business owners continue to adapt to operating in new ways, one area that will undoubtedly be forever changed is how business tenants and commercial landlords navigate lease agreements.

As landlords make modifications to protect both themselves and their tenants, there are several commercial lease terms we might expect to see changes to moving forward. Above all else, we encourage parties on both sides of negotiations to be flexible when they can, and understand that landlords and tenants are to a certain degree partners in these business relationships, each facing their own challenges.

Force majeure clauses

A force majeure clause in a commercial lease (to the extent one exists – and these clauses should be included in the lease) relieves the parties involved from fulfilling their duties as stated in the force majeure clause. The interpretation of these clauses is based on the specific language used, and some clauses are not as clear as they could be. For example, COVID-19 might fall into the category of public health crisis or pandemic, terms which might not be specified in your lease and therefore do not fall into the category of “force majeure.” Post-COVID, we anticipate language in these clauses will become more elaborate to cover a wider range of unexpected events. From the landlord’s perspective, it should be clear in the force majeure clause that force majeure events shall not excuse a tenant’s obligation to pay rent or other charges under the lease in a timely manner.

Shorter lease terms

With the uncertainty facing businesses, it’s no surprise that commercial lease terms have been decreasing in length, and adjusting your own lease terms moving forward can be a smart move to avoid long-term commitments in the midst of effects from coronavirus. Tenants may be more likely to commit to a new lease or renewal if they don’t feel locked in in the event of business disruption.

Continuous operation and flexible office solutions

With future government-mandated restrictions not out of the question, businesses of all types should be prepared for the potential of a future shutdown. Some lease terms may express that businesses should be open and operational under certain conditions. Perhaps a landlord should require a restaurant tenant to operate on a carry-out basis even if the dining room is closed. It might make sense to insert a provision requiring a tenant to reopen within a certain period of time after it is legally allowed to do so.

Likewise, office tenants who previously needed a certain amount of space may be facing a drop in employees and more requests to work from home. A landlord allowing for flexibility in space modifications can mean the difference between the tenant staying in its current location or searching for a new space.

Health and safety issues

Since we will continue to face new procedures and safety precautions as more and more people adapt to working in shared environments again, landlords should include language in their lease terms that specifically address health and safety issues related to COVID. These might include the following:

  • Landlords should disclaim any warranties or representations about air-quality.
  • Landlords should reserve the right to introduce building rules and regulations relating to virus outbreaks, including restrictions on use of elevators, common areas, etc.
  • Landlords should enhance the lease provisions relating to tenants complying with laws, rules and regulations to include CDC and state and federal mandated health and safety protocols and guidelines.

You may also want to revisit terms that express the way in which landlords can give notice to tenants. With tenants working from home or operating at new times, both parties may agree that email can serve as a valid method of serving official notice on certain matters.

Now is the time to review lease terms

If you’re either a landlord or a commercial tenant, now is the time to review your lease before negotiating new terms. Consider the points listed above, and if you need help navigating your commercial lease agreements, our real estate attorneys are available to help.