Implications for Real Estate Investors and Occupiers
Exploring Lease Provisions – Part 1
Dear Clients and Colleagues,
The COVID-19 pandemic has impacted our lives like nothing ever before…. Its implications on the healthcare system, financial markets, and economy are far-reaching… including commercial real estate…
Over the past few weeks, I have been on the phone and video conference calls with many clients, investors, occupiers, service providers, design-builders and experts of many facets of commercial real estate, including calls with Cushman & Wakefield’s GTA and Global leadership, SIOR, etc…
I wanted to provide you with a brief update on what I have learned so far about the impact of COVID-19 pandemic, but please keep in mind that the situation is changing on a daily basis…
So let’s take a look at where we stand as of today… April 10th, 2020
We are all in this together…
Both Landlords and Tenants share a common and unprecedented challenge with the COVID-19 crisis…
All businesses deemed to be non-essential are now closed…. With many employees being laid off or furloughed…
And the situation is constantly evolving; having a significant impact on all businesses, occupiers. investors, and property owners…
These challenges may include complete or partial loss of use, whether by governmental mandate, landlord action, or corporate directive, a loss of income, service disruptions, construction and delivery delays, as well as increased health, safety and sanitation costs.
Small- and medium-sized businesses have been hit especially hard…
Smaller Landlords, Private Equity and Institutional Landlords alike have all received calls looking for some kind of rent relief.
To get a better sense of the impact on even larger corporate occupiers we can look at Prologis, one of the world’s largest property owners of industrial real estate with a market cap of $60 Billion and a portfolio size of about 964 Million SF, as a sort of litmus test. They announced this week that nearly a quarter of its Tenants are seeking some kind of rent relief. Drilling down into the weeds, on average, 24% of Tenants are requesting 69 days of rent relief; where only about a quarter of those may be granted.
The biggest – and admittedly difficult to address – issue for Landlords is to determine which of their Tenants have legitimate, existential issues and which ones are simply being opportunistic and looking to receive the same benefits as everyone else…
The bottom line is: Landlords still need to make mortgage payments and there is no obligation on the Landlord to bail out Tenants… Technically and legally, Tenants will be in default if rent is not paid on time…
This is a starting point from where we can then examine other possible solutions.
In the wake of these challenges, many of you may be wondering if and how your financial obligations under your leases might be alleviated; either by the lease language itself or through your insurance policies.
The determination of these solutions is further complicated by the rapidly evolving body of pending and proposed legislation, economic relief programs, and governmental actions.
In our view, tenants should consider keeping meticulous records of any COVID-19-related issues, as such documentation may prove helpful during discussions with your landlords and advisors, as well as with any potential filing of insurance or legal claims or applications for emergency funding.
These issues are lease and fact-specific, and as such, consulting with your solicitors, insurers, tax consultants, and other advisors will help you to best understand and protect your rights.
It is therefore important to review the provisions of your Lease Agreement that may be applicable to this situation.
This week we will cover one of the provisions that has received much attention and coverage over the past two to three weeks… and that is Force Majeure… (Next week we will look at Business Interruption Insurance)
This provision may provide for the excuse or suspension of the performance of contractual obligations due to an intervening event that makes performance impossible or impracticable.
Force Majeure Lease Agreement Clause – Typical Example:
“Notwithstanding any other provision of this Lease, whenever, and to the extent that any party to this Lease shall be unable to fulfill, or shall be delayed or restricted in the fulfillment of any obligation (other than the payment of monies) under any provision of the Lease by reason of:(a)strike;(b)lock-out;(c)war or acts of military authority;(d)rebellion or civil commotion;(e)material or labour shortage not within the control of either party;(f)fire or explosion;(g)flood, wind, water, earthquake or other casualty;(h)any applicable lawful statute, law, by-law, ordinance, regulation or order;(i)any event or matter not wholly or mainly within the control of the party having the obligation; or(j)act of God, not caused by the default or act of or omission by such party and not avoidable by the exercise of reasonable effort or foresight by it, then, so long as any such impediment exists, such party shall be relieved from the fulfillment of such obligation and the other party shall not be entitled to compensation for any damage, inconvenience, nuisance or discomfort thereby occasioned.”
Please note that, in the Common Law jurisdictions of Canada, Force Majeure can only be invoked where provided for in an agreement, and its application and effect are determined through contractual interpretation.
First, a party seeking to rely on Force Majeure must establish that the intervening event falls within the contract’s definition of Force Majeure. Specific terms like “epidemic”, “disease” or “pandemic” would likely apply or maybe even more open-ended language like “government or administrative action” or “other events beyond the reasonable control of the parties”
Second, the party invoking Force Majeure must establish that the event sufficiently impacted its performance.
Third, Force Majeure provisions have strict notice requirements, so please read the language in your Lease Agreement.
Finally, when successful, the Force Majeure clause will only suspend the parties’ performance of a contractual obligation for the duration of the Force Majeure event.
Therefore, keep in mind, that most leases expressly exclude financial obligations from these provisions, meaning that the parties will have a continuing, uninterrupted obligation to make payments such as rent; to maintain insurance; fund allowances; and other agreed sums as and when due in accordance with the lease.
Some other provisions in the Lease Agreement that are relevant are Security Deposit, Default for Non Payment of Rent and Abandonment, Impossibility of Performance and Interruption of Services…
Security Deposit – It may be helpful to review the specific conditions under which the landlord is entitled to draw down on a security deposit, and time periods for cure.
Security Deposit Lease Agreement Clause – Typical Example:
“Tenant shall deposit with the Landlord upon execution of the Lease the security deposit as set out in Schedule “C” as security for the Tenant’s faithful performance of the Tenant’s obligations hereunder. If the Tenant fails to pay Rent or other charges due hereunder or otherwise defaults with respect to any provision of this Lease the Landlord may use, apply or retain all or any portion of the security deposit for the payment of any Rent or other charge in default or for the payment of any other sum of which the Landlord may become obligated by reason of the Tenant’s default or to compensate the Landlord for any loss or damage which the Landlord may suffer thereby. If the Landlord souses or applies all or any portion of the security deposit the Tenant shall within ten(10) days after written demand thereof deposit cash with the Landlord in an amount sufficient to restore the security deposit to the full amount herein above stated and the Tenant’s failure to do so shall be a material breach of the Lease. If the Tenant performs all of the Tenant’s obligation hereunder the security deposit or so much thereof as has not therefore been applied by the Landlord, following an inspection of the Demised Premises conducted by the Landlord and acknowledged by the Tenant prior to the Tenant vacating the Demised Premises, shall be returned to the Tenant at the expiration of the term hereof, and after the Tenant has vacated the Demised Premises.”
Default for Non Payment of Rent and Abandonment – It may be helpful to review the specific conditions which trigger an event of default, including monetary non-performance, abandonment or failure of continuous use, and time periods for cure.
Default for Non Payment of Rent and Abandonment Lease Agreement Clause – Typical Example:
“The occurrence of any of the following shall constitute a material default and breach of this Lease by the Tenant:
- the Tenant shall have failed to pay an installment of Base Rent or of Additional Rent or any other amount payable hereunder when due, and such failure shall be continuing for a period of more than five(5) days after the date such installment or amount was due;
- the Demised Premises shall be vacated or abandoned, or remain unoccupied without the prior written consent of the Landlord for five(5) consecutive business days or more while capable of being occupied;”
This is a continuously evolving situation…
Whether you are an Investor or Occupier or Lender we understand that the impact of the COVID-19 pandemic on your business may be significant. All parties involved have keen issues they are focused on and potentially different priorities at this moment. Proper and transparent communication is what will sustain and strengthen the relationships that will get us to the other side… Just remember…
We are all in this together…
DISCLAIMER: All information herein is for informational purposes only. This is not intended as professional legal, tax or accounting advice. We are not liable for any damages, real or perceived, as a result of you receiving or consuming this information. Please consult your attorney, accountant, or other counsel prior to making any decisions…
As we navigate through these uncertain times, rest assured that our team is working diligently to meet the needs of our clients and colleagues. The manner in which we do business is changing constantly, but our commitment to providing the best information and advice remains the same.
Cushman & Wakefield’s leadership team and research resources are committed to providing information on the overall economic and, specifically, the commercial real estate impact due to this pandemic. Please continue to check cushmanwakefield.com for the latest information regarding COVID-19 and the commercial real estate industry.
We’re all in this together, so please reach out with any needs you may have during this time.
Please stay healthy and safe.
Goran Brelih, SIOR
Senior Vice President, Broker
Cushman & Wakefield ULC, Brokerage.
Immediate Past President, SIOR – Central Canada Chapter