5 tips for handling commercial leases and contracts during COVID-19 and beyond

Credit: Clark Wilson on Twitter

Whether you’re a tenant or a landlord, here’s some advice to help you pull through the pandemic

With rent due on April 1, the COVID-19 crisis has left commercial landlords and their cash-strapped tenants scrambling to figure out a way forward. Looking ahead, the outbreak could also see pandemic clauses become a standard feature of commercial leases and agreements.

For some tips on dealing with leases and contracts during this difficult time, we spoke with two Vancouver-based partners at law firm Clark Wilson: William Holder, whose specialties include commercial real estate and business litigation; and business litigation specialist Brent Meckling.

1. Buy yourself some time by deferring rent

Landlords prefer to see their premises rented out, and tenants will want to survive the crisis and stay in business at the location they worked so hard to establish, Holder says. Having talked to tenants and landlords over the past several days, he’s noticed that both parties are communicating with each other, which he calls a good first step. “And they are actually reaching some kind of accommodation, at least to deal with April.”

Although a landlord might agree to forgive April rent outright, deferring payment is the more common approach at the moment, Holder says. “Some parties are looking further down the road and seeing if they can reach a longer agreement,” he adds. “But for the most part, I think people are trying to buy time.”

Having deferred April payment, tenant and landlord can revisit things at the end of the month, Holder suggests. “We might have a much clearer picture of what things are looking like in terms of business and moving forward,” he says, noting that there could also be more government assistance for small business by then. “So in my view, there’s no need to try to do everything at once.”

2. Get it in writing

If you strike a deal on rent with your landlord or tenant, make sure there’s a written record, Holden counsels. “Most leases say that in order for there to be an amendment to the agreement, it should be in writing, signed by both parties.”

3. Remember, everyone’s in the same boat

For landlords and tenants during the pandemic, it’s a two-way street. “People are very focused on the tenant’s ability or inability to pay rent for April 1, and rightly so,” Holder observes. But for their part, landlords have operating costs such as mortgage payments, heating and security. “Some of the agreements I’ve seen done right now are deferrals of that base or minimum rent, but the tenant still agrees to pay its share of operating costs,” Holder says. “This is a problem for both landlords and tenants, and that’s why I think we’re seeing them come together and do their best to resolve things, at least for the time being.”

4. Make room for a pandemic clause

Leases and other commercial contracts include force majeure clauses, which cover so-called acts of God like earthquakes and floods. Although he hasn’t seen it in leasing yet, Meckling says some commercial arrangements now have carve-outs for pandemics. “Instead of having it buried as one item among a number of enumerated items in these force majeure clauses, they’re looking to carve out a separate clause that deals with these kinds of health issues.”

Holder’s take: “I wouldn’t be surprised if, once we’re out of this current situation, future lease language or future contracts between parties are revised to somehow address these kinds of concerns going forward.”

Commercial contracts don’t face the same time pressure as leases, so Meckling hasn’t seen a big push to enforce or avoid contracts, given that businesses have been preoccupied with leasing issues. “Once those are addressed, in the coming weeks we might see more activity on the straight-ahead commercial agreement side.”

As they look beyond the pandemic, though, parties to commercial contracts will want to preserve business relationships they’ve spent years building, Meckling reckons. “It might be more just a temporary suspension or modification of obligations that are recorded in writing,” he says. “I would be surprised if there’s a big move by parties to demand payment or demand strict compliance with the terms of these agreements.”

5. Thinking of suing? Think again

“It’s easy for lawyers to say, Hey, let’s get on a litigation train here; let’s try to enforce, let’s bring lawsuits,” Holder notes. “But it’s worth remembering that as we speak, our courts are closed except for emergency applications.”

If you do file a court application because somebody is breaching a contract or a commercial lease, be prepared for the process to move slowly, Holder says. “You could easily see, if the situation continues, a lawsuit take many months to get resolved either way. And in the meantime, we may well have weathered the storm, so to speak.”