ITRA Global was delighted to host a webinar recently featuring global law firm, Cooley LLP, Jack Lavoie and Partner and Head of Real Estate practice group, and Michelle Garcia Shulman, Partner, who shared valuable input in terms of protecting our corporate clients going forward and post-pandemic, wherever located around the world. Our sincere thanks to Cooley and to Jack and Michelle for a fascinating discussion and this summary.
As the country reopens and business activity gradually resumes, commercial landlords and tenants are left with much uncertainty about the risk of a “second wave” of COVID-19 or another pandemic. Cooley’s real estate team understands the evolving situation and has produced the following recommendations for parties whether they are dealing with current leases or thinking about entering into new ones.
4-Step Plan for reviewing existing lease agreements.
#1. Review your agreements. Landlords and tenants should begin by identifying the key clauses that may have been implicated by COVID-19. These include standard force majeure, interruption of services and insurance provisions. The parties should then determine what specific relief they are entitled to pursuant to those sections of the lease and any actions that must be taken to preserve their rights, such as documenting a claim or providing the other party with written notice.
#2. Identify impacts. Next, the parties should identify what impacts the pandemic has had on their business. Access to relief under the relevant lease provisions identified in Step 1 often depends on the claimant having thoroughly documented events as they emerge so that there is a clear record when any potential dispute or claim comes to be resolved.
#3. Develop a strategy. Third, landlords and tenants should be aware that they may have a legal duty to mitigate any damages that are incurred as a result of COVID-19. This duty is commonly invoked when a party tries to raise force majeure as an excuse for non-performance. But it can also arise when a tenant breaks a lease. In some states, the landlord may have a duty to re-let the premises and minimize damages from the tenant’s breach. As such, landlords and tenants should develop a strategy for mitigating any damages.
#4. Communicate. Finally, landlords and tenants should strive for precise, factual and straightforward communications with counterparties, vendors and service providers about how exactly they have been affected by the pandemic. One of the primary aims of any dialogue during this time should be to preserve professional relationships in a post-COVID-19 environment.
Standard lease and LOI provisions to consider when negotiating new agreements.
Force majeure – Parties should consider broadening the list of force majeure events to include actual and threatened health emergencies (including COVID-19). Tenants should try to include any event that prohibits, restricts, limits or materially delays normal operation of their business, with reference to shelter-in-place orders. Tenants can also push for rent abatement during a pandemic, since rent is not normally an obligation that is excused under force majeure. Keep in mind, however, landlords also have financial obligations to their lenders, which may impact their ability to agree to rent abatement.
Communication – Parties may want to include language that creates a formal process for landlords and tenants to notify each other with regard to any health issues that arise in the building.
Cleaning specifications – Maintenance provisions will need to be updated to account for increased cleaning in common areas and within the premises. The lease should also ensure that vendors and janitorial staff adhere to more stringent guidelines, including mandatory face masks where applicable.
Security – In many buildings, there will be a need for increased security and screening. Landlords may want to require advance notice periods and visitor logs for tenants’ guests. Some landlords may also want an assumption of risk waiver from each tenant.
Capital expenditures – Capital expenditures will increase as a result of new technologies required for improved cleaning, touchless doors and filtration systems. Parties may need to define a new category of expenses, similar to treatment of LEED/sustainability costs in recent years. Tenants should request a cap on these expenditures if they are unavoidable.
Common area maintenance – Landlords should seek greater discretion over closing or limiting common areas. Many back-to-work handbooks being released by building owners prescribe a one-person limit in elevators and enhanced guidelines for package deliveries. Leases should be tailored in a way to account for these re-entry practices that are quickly becoming standard across the industry.
Landlord default – Tenants will most likely push for a more robust landlord default provision to address increased obligations regarding communications, cleaning, security and enforcement of measures that are recommended (and in some jurisdictions required) such as facial coverings and limitations on the number of persons permitted in elevators or common areas.
ITRA Global is one of the largest organizations dedicated to representing tenants and occupiers of commercial real estate. With experience in more than 300 markets around the world, ITRA Global consists of seasoned professionals specializing in representing tenants and buyers in the leasing, acquisition and disposition of office, industrial and retail real estate. Clients benefit by having an experienced professional as their trusted advisor, providing conflict-free representation with total objectivity.
