The general economy continues to struggle due to COVID-19 closures and related effects, and the real estate market is no exception. Landlords are receiving requests from tenants for rent reductions, deferrals, abatements and other concessions. Although the terms of agreement vary, there are two common approaches to documenting these alternative arrangements, forbearance agreements and lease amendments.
Landlords Will Prefer Forbearance
For landlords, a forbearance agreement will often be more favorable than a lease amendment. Forbearance agreements do not excuse defaults, but rather defer enforcement pending the forbearance period. During the forbearance period, certain conditions, often more stringent than those in the underlying lease, must be observed. Following the forbearance period, rent must be wholly or partially repaid (possibly with a premium and/or on condition of pledging additional security). If a tenant fails to perform under a forbearance agreement, the breach “awakens” the rent default from the time of the first non-payment. The landlord may also insist that term of the lease be extended in order to account for the forbearance period. Although not titled a lease amendment, a forbearance agreement should be considered a modification that may require any lender’s consent (discussed below), and may also impact any lease guaranty.
A Lease Amendment May Be a Better Approach for Tenants
A lease amendment, on the other hand, changes the contractual obligation to pay rent during the agreed-upon period, and often is structured as if the obligation did not exist for that time. During the rent suspension period, no default exists under a lease amendment. As result, tenants will prefer a lease amendment. Like forbearance agreements, amendments can and often do require repayment of the rent after a specified time period. However, for a tenant, an amendment may give the tenant a second bite at the apple, including cure times for late payments, which are often tightened under forbearance agreements.
If there is a mortgage on the property, the parties should carefully review its terms prior to entering into either a forbearance agreement or lease amendment. Particular attention should be paid to negative and affirmative covenants, reporting requirements and defaults, among other provisions. If necessary, the lender’s consent to any modification of lease terms should be obtained. And tenants should inquire whether the landlord’s lender has allowed any mortgage repayment concessions due Covid-19 issues. If so, the tenant may request the landlord to extend a similar concession to the tenant.
CARES Act Issues
The federal stimulus Coronavirus Aid, Relief and Economic Security (“CARES Act”) includes the Paycheck Protection Program (“PPP”). One PPP feature allows forgiveness (subject to conditions) of all or a portion of funds received upon a showing that the funds were used for payroll, rent and utilities. Landlords may wish to include in any revision to rent terms a payback requirement if the tenant receives PPP funding that is or could be applied to rent. Landlords may require tenants to apply for those benefits as a condition to any agreement. Similarly, lenders may require borrowers seeking mortgage payment relief to first seek PPP funding.
About the Author: Richard M. Coen
A business-first lawyer with a finance background, Richard Coen has spent his 20+ years in the legal profession helping decision makers maximize profit and minimize risk. Often, business and legal considerations converge; Richard gets to know a client’s business and overall industry so that his legal advice is tailored to his client’s situation. Richard’s practice focuses on commercial real estate law, finance and public-private partnerships. His clients include real estate owners, lenders and developers in the acquisition, sale and leasing of all types of commercial properties. He regularly advises lenders in secured and unsecured lending transactions. He can be reached at email@example.com or 401.831.3010.