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Between a Rock and the Tenant: the Landlord Conundrum – Five Things to Consider in Connection with a Lease Modification Request

By Joshua Kligler Lease, Real Estate, Uncategorized
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A lease modification is defined as “a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease.” Examples of lease modifications include: 1) increasing or decreasing lease payments; 2) shortening or extending the term of the lease; and 3) changing the terms of use. As shelter-in-place orders are extended, quarantines continue, and businesses struggle to make ends meet, landlords will likely confront increased tenant defaults under their leases and tenant requests for deferrals on rent payments or other modifications to their leases. Prior to engaging in substantive discussions for lease modifications or rent deferrals with tenants, landlords should evaluate a number of items including the following:

1.     Review Lease Documents. Identify default provisions and consider possible claims by tenants of force majeure, frustration of purpose or impracticability of performance, and material adverse changes, as tenants may attempt to invoke such provisions or legal theories. Understanding potential downside or walkaway risks will aid in understanding what options are available and the best course to pursue those options. For example, it is possible that there are rent adjustment clauses that are triggered in the current conditions. It’s also a good idea to re-read the lease agreement with the new provision(s) in mind to ensure there are no contradictions.

2.     Lender Obligations and Consent. Review your loan documents and understand your obligations and covenants under their terms, particularly those that may be affected by lease modifications. Identify whether lease modifications or rent deferrals require lender consent or would otherwise trigger either monetary or non-monetary defaults.  If so, contact your lender to provide requisite notice and receive consent to enter the contemplated modification.

3.     Operating Expenses. There may be additional expenses directly related to the basis for the modification, such as cleaning and disinfecting costs. Depending on the type of lease, these operating expenses may be expressly allowed to be passed through to the tenant.

4.     Disclosures. Companies and individuals may be required to disclose information about the effect that the lease modifications have on their financial position, financial performance and cash flows. It may be prudent to also request whether tenant has applied for and received available government aid to cover rental or other overhead expenses.

5.     Effective Date. This is the date that both parties agree to the lease modification. The financial obligation to make the payments and use the asset are remeasured at this date.

This article is for information purposes only and is not offered, nor should be construed, as legal advice.

If you have any questions about the issues addressed in this article or for additional COVID-19 related business information, please do not hesitate to reach out to Michael P. Dunn ([email protected]), Joshua C. Kligler ([email protected]), or Yosef B. Shwedel ([email protected]) to discuss further.

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