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How COVID-19 Is Creating a New Tenant-Landlord Office Lease Reality

Jul 07, 2020 by Marc Rapport

Robert Reichman and Jonathan Weiss are New York attorneys who negotiate and help manage leases on acres of office space every year for tenants that include major law firms and other professional services providers around the country and the world.

They're now working at home for the most part themselves, as are many of their clients who are calling to ask: "Do we still have to pay our rent?"

"The answer is yes," says Reichman, who partners with Weiss in the real estate practice group at Greenspoon Marder LLP. "Even with the stay-at-home orders from COVID-19."

"Force majeure" rarely forces rent relief

Reichman and Weiss say they've been able to negotiate some limited abatement for future pandemic-related shutdowns and that there's been some relief granted to clients in the current crisis, but it's very rare.

That's because while residential leases tend to favor the tenant in many states -- and certainly residential mortgages and rentals have been the focus of much current relief -- commercial and office leases in general hold that as long as the building is open, the tenant cannot refuse to pay rent, Reichman says.

That's despite the "force majeure" (meaning greater force) clause that's included in most contracts that tenants sign with property owners, which frees both sides from their obligations in case of acts beyond their control, like war, weather, and plagues.

That clause would excuse tenant or landlord performance of some matters, such as completing a build-out, but it would never excuse payment of rent, Weiss says.

Zooming toward a new normal

The partners are working on including pandemic-related shutdowns in future leases, working now mostly "through lots of Zoom (NASDAQ: ZM) calls," Reichman says.

In this give and take, tenants and landlords are both looking to protect themselves from government shutdowns, natural disasters, or other disruption of supply chains and related services that sharply hinder the ability to not only occupy space but to get the space ready to be occupied.

They're also working with the reality that because landlords have their own obligations, including for their own mortgages and property taxes, sharing risk is an imperative that precludes landlords from realistically including complete rent relief.

Sharing risk and filling the silence

Reichman and Weiss say the first best practice they recommend to landlords and tenants alike is to hire experienced professionals who understand the obligations and interests on both sides of the relationship. That way time isn't wasted on seeking the unrealistic or impractical.

As for specifics, landlords tend to be more amenable to deferrals rather than simply waiving the rent if disaster strikes. Insurance also plays a large role. Health emergency insurance, for instance, is available, but it's an expensive line item that a landlord would naturally try to pass on to a tenant.

Document what can be anticipated

There also are new realities to deal with, such as pandemic-caused delays in getting a building or new office space in an older building ready for occupancy. And then there's liability for virus outbreaks in an office building.

"How do you handle obligations for cleaning issues? There's obviously a level of proof around cleaning of common areas, for instance, but negligence would be very difficult to prove," Reichman says.

Ultimately, try to include as much as can be anticipated into a lease. "Get as much resolved initially as you can. Document everything, and avoid as much silence in the document as you can on issues that may arise," Reichman says.

Preparing for the unexpected in a long-term relationship

Reichman and Weiss are using their decades of experience to negotiate the best leases they can for their clients, with a major focus on trying to expand the landlords' performance obligations and their client tenants' protections through widening the definition of such items as public health emergencies.

They represent tenants, primarily, but they realize these are not one-off deals. "Remember, this is a prospective relationship that may go on for five or 10 or 15 years or longer," Weiss says of the leases they help execute and maintain.

For instance, pandemics weren't on their mind when they negotiated the lease on 170,000 square feet of new office space for the Wiley law firm in downtown Washington, D.C., but they were able to work some terms in that were to the satisfaction of both sides of the deal after the pandemic shut down the district.

"You try to anticipate future unknown events, but you can't predict everything," Reichman says.

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Marc Rapport has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zoom Video Communications and recommends the following options: short August 2020 $130 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.

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