Pandemic Lease Modifications: Addressing Legislative Developments

With COVID-19 raging and many businesses, large and small, seeking to manage their overhead and obligations, commercial landlords and tenants are examining their leases for potential modifications that would enable them to preserve their cash flow in the short-term without damaging each other’s long-term prospects. The effects of the pandemic continue to be felt, and the legislative process is beginning to address some of the commercial repercussions brought on by the rapid onset of this public health crisis.

As the parties reach accommodations and document their arrangements, commercial landlords should consider what provisions to include in these documents to address legislative developments that have occurred and perhaps anticipate legislative developments that may occur in the future.

Provisions to consider:

1. Eligibility for PPP Benefits – Is /should it be a requirement that a tenant seeking rent relief be eligible for a loan under the Paycheck Protection Program? The program requires that the applicant certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” As the owner of the property may be required to make a similar certification at some point should it seek assistance, the owner of the property should include this certification from the tenant in any modification document.

Along similar lines, PPP proceeds are allowed to be used for rent, covered mortgage interest and utilities in addition to payroll. If the party requesting relief has either obtained PPP funds, or in the future obtains PPP funds, the party granting such relief may want a representation to that effect and if such funds are received in the future, a covenant that the party requesting relief will utilize such funds to pay or repay relief granted.

2. Lease Guaranties – In May 2020, New York City enacted Local Law 1932-A, which makes it a form of harassment for a commercial landlord to seek to enforce a personal guarantee affecting certain types of commercial tenants. As extended, Local Law 1932-A applies to defaults occurring through March 31, 2021. This statute makes these lease guarantees unenforceable against “natural persons who are not the tenant.” While the legislation enacted raises issues as to its constitutionality and other questions of interpretation, it may be worthwhile to consider making the guarantor a co-tenant under the lease, even if only for the limited purpose of re-paying any rent relief granted.

3. Bankruptcy Considerations – In a measure incorporated into the United States Consolidated Appropriations Act, 2021, commercial landlords were given protection from claims that “covered payment of rental arrearages” paid pursuant to forbearance or deferral agreements entered into on or before March 13, 2020 would constitute a voidable preference in bankruptcy (subject to certain limitations of course).While the date to enter into such agreements has obviously passed, characterizing repayments of rent relief as “covered payments of rental arrearages” in future agreements could be worthwhile in an effort to bring future agreements within the scope of these provisions should the March 13, 2020, deadline be extended or re-visited.

4. Eviction Moratoria – As the prohibitions on landlords to evict tenants for failure to pay rent continue to get extended, the standards for tenants to demonstrate that they have been adversely and materially affected by the pandemic continue to get diluted. In one recent iteration, it is sufficient for a tenant to simply provide a self-serving affidavit to bar an eviction for non-payment. While such an affidavit may be subject to the penalty of perjury, recourse to that remedy may prove unavailing to a landlord who has been unable to collect the rent otherwise due and perhaps is unable or struggling to meet its own obligations as a result.

The landlord negotiating a lease modification granting rent relief may want to seek a provision requiring the tenant to provide periodic financial reporting to the landlord as a condition to such relief and perhaps as a condition to the continuation of such rent relief.  A tenant’s failure to comply with such an obligation could be an independent default, the prosecution of which is not barred by the applicable moratorium.

Of course, the situation remains fluid, and our lawyers will continue to monitor additional legislative initiatives as they unfold.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.