Rent Deferral Agreements for Defaulted Commercial Leases: Pre-Negotiation, Risk of Insolvency, Landlord Due Diligence

Description

As the economy continues to struggle, commercial landlords and tenants are left trying to save their leases while mitigating pandemic-related harm. A well crafted rent relief agreement requires balancing potential liabilities for both sides to provide tenants with leverage to remain in their spaces and landlords with assurances that tenants will eventually be able to pay rent.

Counsel's pre-negotiations often start with the tenant's written request for a rent relief, clarity about the landlord's expectations of information from the tenant, the potential amount and period of rent relief, and provisions for a finalized rent relief agreement.

The landlord must develop its due diligence plan to evaluate and determine whether, how much, and how long to provide rent relief. The landlord should thoroughly review the tenant's financials and assess the risk of default or insolvency. Landlords can then balance these considerations against their potential cash flow and responsibilities to any applicable lenders and investors.

Tenants will have to weigh the options in a landlord's rent relief offer and the probability that the tenant’s business will survive. In these negotiations, tenants and their counsel must compare the risk of accepting a landlord's offer with the potential additional obligations the landlord will often package with it, such as demands for personal guaranties or relinquishment of security deposits.

Listen as our expert panel provides the advantages and risks to landlord and tenant counsel when entering a rent deferral agreement and best practices to develop a plan and lease modification that would be considered successful by all parties.