Since the COVID-19 pandemic began, commercial Landlords and Tenants have brainstormed ways to address the risk of future government shutdowns in the context of new leases and lease renewals. Landlords generally wish to lock in long term deals and Tenants generally wish to minimize the risk of having to pay full rent during a government shutdown. Often if the parties agree in concept to some form of rent abatement under limited circumstances and for a limited period of time, the Letter of Intent will include vague language such as “pandemic clause” without specifying the terms. While this may allow the transaction to proceed to the next stage of negotiations, it exposes both parties to the risk of spending time and money only to discover that the terms of the “pandemic clause” are a sticking point that delays or even prevents lease execution.
The obvious solution to this problem is to flesh out the terms of the pandemic clause in advance. There are generally three facets to consider: the trigger, the abatement amount and the duration.
The trigger may be specific. For example, base rent shall be abated in the event of a government shutdown due to a global COVID-19 pandemic. The trigger may be general. For example, base rent shall be abated in the event that Tenant is unable to operate. Or the trigger may be a middle ground compromise. For example, base rent shall be abated in the event that Tenant is unable to operate its business in at least fifty percent (50%) of its demised premises due to a pandemic.
The abatement amount may be simple. For example, Tenant shall pay fifty percent (50%) of its base rent. Or the abatement amount can be complex. For example, Tenant shall pay a percentage of base rent based on the percentage of floor area the Tenant is legally permitted to open to the public.
The duration of the rent abatement can be linked to the duration of the government shutdown or capped at a certain number of months. The duration also does not need to be “all or none.” For example, Tenant can receive a rent abatement for a specified period and then the rent abatement can be reduced for an additional period.
It should also be noted that Landlords can attach conditions to any pandemic clause. For example, the Landlord may require the Tenant to apply for government assistance during a shutdown and assign any government assistance to the Landlord to pay rent arrears as permitted by law.
Based on the foregoing, while many commercial landlords are now including pandemic clauses in their leases, the terms of the clause can vary significantly. The more the brokers can negotiate up front and include in the Letter of Intent, the lower the risk of attorneys getting bogged down in this issue during lease negotiations.
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