The coronavirus (COVID 19) is causing tremendous strain on residential and commercial tenancies throughout the State of New Jersey. With respect to commercial tenancies, here are suggestions and options landlords may have in case the tenants have not paid rent or requested concessions.
- Encourage commercial tenants to pursue insurance claims, where applicable, and to apply for Small Business Administration Emergency Disaster Assistance Fund loans or the Paycheck Protection Program which has loans for current payroll (which may under certain circumstances provide loan forgiveness). Direct tenants to State of NJ EDA and local assistance programs, including those run by cities and local chambers of commerce or regional foundations.
- Landlords should review their own insurance policy to see if they have business interruption insurance to cover their losses. Many insurance policies contain exclusions for viruses or pandemics, but it is worth reviewing the policy to determine if any coverage is available.
- Governor Murphy’s Executive Order placed stayed residential evictions and foreclosures, but it does not prevent the filing of a summary possession against for non-payment of rent against a commercial tenant. That said, while a complaint may be filed against a commercial tenant, such a lawsuit will not be heard until Courts are re-opened to the general public, and the Court has suspended all landlord/tenant trials until May 31, 2020. This doesn’t mean that you can’t file an eviction action, it simply means that your matter will not be heard as promptly as it would have prior to the COVID-19 crisis. On top of that, the tenant may have a defense to payment under the lease, e.g. force majeure or common lease provisions like “quiet enjoyment,” or defenses of impossibility, impracticability, and frustration of purpose may apply.
- Landlords and commercial tenants are permitted to agree in a lease that the landlord is permitted to reenter the own property following a tenant’s failure to pay rent, but only if such a provision clearly and unequivocally affords the landlord this right. The reality is that unless the lease provides for self-help eviction by the landlord – meaning a landlord specifically has the right to re-enter the property and evict a tenant without going to Court, a landlord should not take matters into their own hands. New Jersey Courts have warned repeatedly warned commercial landlords against doing so and such actions can result in a tenant filing an action against a landlord for unlawful distraint, and intentional interference with the tenant’s business.
- A landlord should not automatically grant a rent concession. Rather, consider each case separately including the following:
- Documented tenant loss and need for a concession after considering whether the tenant has applied for all available relief programs and insurance coverage;
- Tenant credit, current and past financials demonstrating that the inability to pay is due to the impact of COVID-19;
- Tenant payment history and ability to pay in the future;
- Remaining term on the lease;
- Existing lease terms that could be modified in exchange for a rent concession, such as the addition of a relocation clause or elimination of a right-of-first-refusal, right-of-first-offer, expense caps or other terms;
- Addition of a personal guarantee;
- Impact on other leases if an anchor tenant leaves, i.e. do other leases in the shopping center require specific anchor tenants? Consider the overall impact on the property; and
- Finally, consider these long term impacts, including: cash flow, occupancy rates, and loans and the ability to modify loans with covenant deferral or waiver of loan or waiver of loan covenants, payment restructuring payments such as interest-only, etc.
Some concessions and/or solutions that may be used include (note that your loans may provide that cannot amend or modify a lease without the prior written consent of the lender):
- Apply the security deposit (if available) to rent;
- Collect common area maintenance/tax charges only;
- Reduce, defer or abate rent for a set period of time, with no repayment, in exchange for more favorable lease terms, such as an extension of the term, termination of options or rights of refusal/first offer or elimination of exclusive or restrictive use provisions;
- Reduce or defer rent for a set period of time with repayment amortized over the remaining term or extended-term. Alternatively, obtain a promissory note for the rent secured by a personal guaranty;
- Reduce rent to percentage rent ;
- Suspend late fees and/or other charges for non-payment;
- Suspend defaults for continuous operation/minimum operating hours;
The information in this blog does not constitute legal advice.
If you have any questions about managing the landlord-tenant relationship or the impact of COVID-19 on your business, or if you are a commercial landlord or tenant who needs assistance with restructuring your lease, please contact Benjamin Zeltner, Esquire, by e-mail or call (609) 348-1300. Our office conveniently located in Atlantic City represents clients throughout New Jersey including Atlantic County, Cape May County, Camden County, and Ocean County