By Andrew J. Williams, Attorney at Law
While the COVID-19 pandemic has obviously resulted in far-reaching and fundamental impacts to the commercial real estate market, one phenomenon I have noticed in my leasing practice is the increased interest and focus my clients have on lease provisions that they previously thought of as “boilerplate”. This is understandable, since the pressures of the pandemic have stress-tested the enforceability of leases in several unique ways. Below are a few examples of lease provisions that have taken on new significance for my clients, both with respect to analyzing existing leases and negotiating new ones.
- Force Majeure/Frustration of Purpose – Much has been written about the applicability and enforceability of force majeure provisions as they relate to COVID-19 lockdowns and the disruptions of the pandemic. Once a provision located near the end of most lease forms that many landlords and tenants glossed over during their review, the question of whether or not it applies in a given lease dispute is now of great importance. Most commercial leases contain the caveat that force majeure arguments will not excuse the failure to pay rent. To counteract this limitation, some of the new leases I have negotiated over the past several months include specific provisions permitting the partial abatement or deferral of rent in case of a new round of COVID-19 lockdowns. This concept is attractive to tenants for obvious reasons. However, some landlords see it as an opportunity to avoid the costly process of dealing with tenant requests for relief on a case-by-case basis, usually requiring attorney-prepared amendments or addenda to existing leases.
- Assignment/Subletting – No tenant enters into a lease with the intention of needing to assign or sublease their space before the end of the lease term, but the new realities of the COVID-19 pandemic have greatly increased the scrutiny that these provisions receive. Many offices and businesses remain closed or are operating at reduced capacity, and so the option of subletting to a new tenant to reduce or eliminate rent expenses is attractive to many. However, before hitting the market to look for a subtenant or engaging a broker to do the same, it is important to dust off this provision in the existing lease to understand whether subletting requires prior written consent from the landlord, which it often does. Some leases even permit a landlord to terminate the lease in response to a request by the tenant to assign or sublet space, which may be a shock to tenants simply exploring their options. It is also common for leases to include a review fee or expense-covering mechanism for approval requests to landlords.
- Subordination and Attornment – It is difficult to think of a standard lease provision more obscure and filled with “legalese” than provisions related to subordination and attornment, but overlooking these provisions can have very significant impacts in the event of a default or foreclosure under a landlord’s mortgage or deed of trust. With the COVID-19 pandemic straining landlords and causing an increase in loan defaults, these provisions are more important than ever. Many leases contain automatic subordination provisions, meaning that the lease is automatically made subordinate to mortgages and deeds of trust in favor of the landlord’s lender. If the landlord subsequently defaults on its loan and the lender forecloses, the lender can sweep away any existing tenant lease that has been subordinated in this way. This may be disastrous to tenants, especially if they have invested significant dollars building out their spaces or if replacement space is not easily found. As protection, some leases provide that subordination of the lease is conditioned upon the execution of a subordination, non-disturbance and attornment agreement (often referred to as an SNDA). An SNDA typically confirms the rights of the lender to foreclose and receive rents, while also providing that the tenant will not be disturbed from possession of its space if the tenant is not in default under the lease. For tenants dealing with foreclosure resulting from a landlord’s loan default, a signed SNDA can be the difference between business as usual and lease termination.
While we all hope the end of the pandemic is in sight, attention to detail in drafting and negotiating lease terms to best protect your interests during unexpected times remains essential.
Andrew J. Williams is an attorney at Carmody MacDonald in St. Louis and focuses his practice in the areas of real estate, corporate law, and mergers and acquisitions. He can be reached at [email protected] or 314-854-8671.
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