As businesses start to re-open there are going to be material short-term (and in some cases long-term) changes in how those businesses operate within the new realities imposed by COVID-19. These will affect not only the operators of the businesses themselves, but also their landlords and lenders. Thus, before any changes are implemented, landlords, tenants, and property managers should review their existing leases, and lenders and borrowers should review their existing loan documents in order to ensure compliance with those agreements. Agreements also should be reviewed with an eye to locating provisions that, beyond a force majeure clause, may afford parties modifying their operations rights to reduce costs.
While every situation is different – and while the number of potential pitfalls and opportunities is large – consider these types of issues that may arise under leases and/or loan documents:
- Specific Operational Provisions. Many leases contain restrictions on a tenant's operations that could impact things like employee and visitor access, testing, and/or social distancing and how they are to be accomplished. Similarly, retail and restaurant leases may contain specific language detailing how the business must operate. For example, a restaurant lease may require the operation of a bar or waiter service, but those operations may be precluded by social distancing requirements; similarly, restaurant leases may impose limits on "take-out" services that are incompatible with the current climate. And, finally, co-tenancy requirements in shopping center leases that are no longer viable (at least not in the short term) may impact the rights and obligations of both landlords and tenants.
- Common Area Operational Requirements. Retail and office landlords should review common area operation provisions to confirm that proposed changes in common area operations will be permitted. In particular, landlord obligations to provide common area amenities (like health clubs) or valet parking should be reviewed.
- Indemnification and Insurance Provisions. These provisions should be reviewed to ensure that changes in operations do not shift or expand liabilities in an unanticipated way. For example, does an office landlord take on additional potential liability by screening visitors in the building lobby? Could a party be required to obtain insurance against pandemic-related consequences even if the coverage cannot be obtained at commercially reasonable rates?
- Reconfiguration/Alteration Provisions. As tenants propose reconfiguring or altering their spaces to deal with social distancing and related concerns, landlord and lender approval rights over such actions should be reviewed.
- Compliance with Laws. Leases and loan documents typically require borrowers to comply with applicable laws. These would include compliance with government-mandated notices and social-distancing requirements.
- Opportunities to Reduce Expenses. Parties should look for opportunities to cut costs. For example, if parking use is reduced because employees are working in shifts, there may be an opportunity to save money by "giving back" optional parking rights.
- Operating Expense "Pass-Through" Provisions. Landlords, tenants, and property managers should review these provisions to determine how changes in operations may affect how these charges are calculated. Among other things, if a tenant's "base year" is 2020, the artificially reduced operating expenses for that year can have an impact. On a related note, to the extent that the landlord is providing or requiring masks and gloves, will the full costs be passed through to tenants? Also, what will be the impact of potentially staggered working hours? Will the concept of "after hours" still be relevant?
- Parking. At least in the short term, the potential health issues related to valet parking and stacked parking (where attendants move cars) need to be addressed.
Venable is actively monitoring these issues and working with clients to evaluate and respond to other emerging business, legal, and operational challenges arising from the pandemic. Visit Venable.com/COVIDTaskForce to learn more about our services and connect with members of our team. We also invite you to visit Venable's COVID-19 Resource Center at Venable.com/COVID-19 to explore our extensive collection of analysis, webinars, and other relevant insights.