CRE Leases Will Need ‘Refinement’ of Current Provisions

The pandemic is an unprecedented event in modern history, and current commercial leases don’t have any provisions to properly address it. Real estate attorneys at Nixon Peabody are already looking at how commercial leases can and need to be refined to respond to future events of this magnitude.

“The story is still being written, but there is no doubt that there will need to be refinement of existing provisions, and more likely than not, depending on the types of properties we are talking about, additional provisions to address the ability to pay rent as the result of a pandemic,” Justin X. Thompson, an attorney at Nixon Peabody, tells GlobeSt.com.

There have been some attempts to use force majeure in other contracts, but those generally don’t apply to lease deals or rental payments, not to mention other regulations created quickly to respond to the outfall. “A lot of people like to go to the force majeure provision, but we have found that a lot of times, those provisions aren’t really applicable to the payment of rent itself,” says Thompson. “It is typically excluded from that provision. What we are dealing with is not something, at least in the modern era, that we have had to face on the landlord-tenant front.”

Lease structures will change to accommodate a range of outfalls related to the pandemic so that both the landlord and tenant have created a fair and equitable response—rather than what we have had here. These provisions will likely address business closures, work-from-home arrangements and deferred rent payments related to future pandemics or like situations that require scaled business closures.

There will also address the government’s response, according to Thompson, who says, “There will undoubtedly be provisions that are drafted to anticipate existing default provisions that take into account government action seeking to prohibit eviction of tenants or postpone payment of rent obligations.” These conversations are already taking place, and not a moment too soon. Some public health officials are already warning that a second wave could come in the fall or next spring.

The government’s response in this pandemic has been fragmented. The Federal Government’s response has been incongruent with responses at the state level, and some states, like California have kicked the ball to local municipalities on certain issues. “It would be useful to have legislation at the state level to have a one-size-fits-all approach rather than the hyper localized approach that has been upending businesses,” says Nahal H. Adler, an attorney at Nixon Peabody, tells GlobeSt.com.

However, in some ways, creating a uniform response is impossible because the very nature of the situation requires a localized approach. “I think that it is given that some industrious politicians will come up with legislation to respond to this, but a lot of times well-intended legislation when applied to the private sector can get some details wrong or leave out key details,” adds Thompson.