COVID-19 - Do I Still Owe Rent?
Do you still owe rent?
The government has ordered non- essential businesses to close, shelter-in- place, and not report to the office.
Cash flow has ceased or is dwindling, the resumption of business is unforeseeable, income is uncertain, and the maze of filing for relief under the CARES Act and/or unemployment has yet to bridge the gap
Can you stop paying rent?
Many businesses are asking themselves what they can do to mitigate the economic impact of the recent pandemic on their current and future cash
flows. Employee salaries and benefits, office lease payments, utilities, and sometimes debt, often comprise some of the largest overhead items for an organization. Many businesses hesitate to furlough employees since this can devastate families and undercut company culture, and therefore look to reducing their lease payments as a way to cut costs.
Contract Remedies/ Insurance
A pressing question on most tenants’ minds is whether landlords are in breach of contract for not creating a safe and habitable environment during this pandemic. They question whether due to a governmental order to shelter in place and not report to the office or store, can they invokeforce majeure (or act of God), in an attempt to get out of paying their rent. LegacyNY cannot assess the legal implications of contract terms, however, we have spoken with several real estate attorneys in New York and have been advised that it does not appear that tenants will be able to successfully abandon their responsibilities to pay
rent on these bases. In addition, most business interruption insurance specifically excludes pandemics, and will also not provide remedy. Each lease and insurance policy is specific to each tenant and circumstance, and we recommend that you speak with your attorney and insurance provider for further clarification on these items.
Although the governor of New York has ruled that no commercial or residential tenant can be evicted from their premises for failure to pay rent, the government has not waived the landlords’ rights to collect rent payments when the moratorium on evictions is lifted. It is still being fleshed out in the legislature on a day to day basis whether late fees, penalties, and other costs will be allowed to be collected for this period of time, and what, if any, evidence of hardship will be required to be shown for failure to pay. Once the moratorium is lifted, landlords will be able to resume eviction proceedings and collect their rents, although the process is estimated to be significantly delayed in the court system, and could take quite a while to become effective. It could be a strategy at this time that if you plan to close your doors permanently, or if your lease is close to its expiration date, and you need to buy time to either run out your lease or have a clearer view of the future of your business, you can simply not pay your rent and take your chances on the delay in the system with regard to evictions. You will need to weigh your breach of duty to pay the rent due under your lease with the legal ramifications and penalties due for this breach, as well as whether you are willing to sever the relationship with the landlord.
Options to Consider
What are your options then and how can LegacyNY help you navigate this uncertain time?
We are advising our tenants to reach out to their landlords with a letter requesting an open conversation on how they can work together to come up with a viable solution to bridge the gap during this 60 to 90 day period of uncertainty. A letter addressed to the asset manager or landlord, coming directly from an officer or owner of the company is a direct “principal to principal” outreach that has been effective in helping to solve immediate concerns from tenants about paying rent, and landlords’ concerns about receiving rent. At this stage of the crisis, we advise that in these communications, tenants incorporate a cooperative, non threatening tone, and demonstrate a desire to work WITH the landlord. Evidence of hardship, proof of other remedies explored in addition to rent remedies will show the landlord that you are not simply taking advantage of the situation and opportunistically attempting to not pay the rent. It is important to demonstrate to the landlord that this is a temporary hardship, and that you expect to resume business once the shelter in place mandates are lifted, and that your business is not one that will simply close its doors and never pay its rent again. At this time we believe you can be most successful, by demonstrating to the landlord that you desire to work together; that you are a viable business with
a future in their building, and not a tenant that will entirely default on its obligations in the near future.
Some remedies we have seen landlords work out with tenants have been:
• A request to hold off on paying April’s rent until relief from the CARES Act is received, with late fees and penalties waived, with a further conversation scheduled for mid-month to check in and make future arrangements.
• A request to defer rent for 90 days, with an interest rate of 5% to be added to the equal installment of payments for a twelve month period beginning January 1, 2021.
• A request to defer April’s and May’s rent, with the landlord drawing down on the letter of credit by the amounts due for these months. • Tenants who have leases expiring in the next year or two have made deals with landlords to extend their leases and have the rent abatement period occur in the next 90+ days instead of at the beginning of the new term
We are available to help you craft your outreach and guide you in the conversations with your landlord(s) to optimize the negotiations and lend our expertise in the market during this crisis. We have a wealth of materials on hand to guide you in exploring the CARES Act remedies, and guide you in your consultations with the experts in the legal and financial sectors to avail yourself of the remedies available to you during this time.
We are working remotely, and are available via email, office phone, or cell phones to assist you with your questions and concerns.
We wish you and your families and business families good health.