Will Coronavirus Bankrupt Commercial Building Owners?

The recent coronavirus pandemic is affecting commercial businesses in unprecedented ways, such as quarantines, event withdrawals, and supply and demand shocks. One of the significant worries for many commercial building owners is whether this pandemic will force them to file for bankruptcy.

COVID-19 has impacted the profits of businesses, making it difficult for them to pay for leased spaces. Governments are announcing the shutdown of offices, buildings, and industries. This decision by the government disturbs not only the tenants who own businesses but also the commercial building owners, as their tenants will not have the means to pay their rent. 

In this time of disturbance and panic, landlords and tenants need to play smart, so they don’t go out of business. Here are some tips that commercial building owners need to take into account.

1.   Personal Protection

During the pandemic, property owners are encouraged to follow the guidelines given by the World Health Organization, Centers for Disease Control and Prevention concerning traveling, and social distancing. Property owners should prioritize the safety and health of their tenants, employees, vendors, contractors, and anyone else that may work there.

2.   Mutual Areas and Public safety 

Common areas are the riskiest places during this crisis. Efforts to maintain complete safety and cleanliness should be made. Commercial landlords are responsible for common areas, such as parking lots, bathrooms, maintenance areas, lobbies, conference rooms, etc. As these places are under the direct control of the landlord, therefore, it is their responsibility to ensure safety in these places. 

3.   Coverage of Insurance

Commercial building owners usually maintain a general liability insurance policy. The property owners should review their system and find out what coverage is available for an interruption in their business due to the potential shut down due to the COVID-19 pandemic. 

4.   Obedience towards government

Property owners should keep themselves updated regarding the latest news and guidelines. Similarly, commercial business owners are encouraged to comply with government orders and regulations.

5.   Managing relationship with your tenant

Commercial property tenants are in a lease agreement with the building owner. The terms of the contract dictate their relationship in place. Therefore, the property owner needs to go through their lease agreements to figure out what decisions to take. Communication between the landlord and the tenant is essential. The two need to work together to come up with creative ideas to prevent future disputes.

6.   Reviewing Loan Agreements

Landlords need to review their loan documents. There are usually debt-to-income ratios and other covenants that obligate the landlord to pay rental revenue on a monthly or annual basis. Any arrangement that is reached between the landlord and the tenant would need to comply with the loan agreements requirements. The following clauses require the attention of both parties.

–         Continuous Operating Covenants 

This policy allows tenants to conduct their business for a specified period or to uphold certain working hours. These clauses are in place to prevent retail properties from having dark storefronts. The quarantine restricts the tenant from working in the leased building, which will affect their capacity to comply with the continuous operation covenants. Landlords and tenants need to discuss if they satisfy the continuous operation clauses if they are only open for a limited number of hours.  

–         Co-tenancy provisions

Landlords often have co-tenancy provision clauses in place that deal with common areas in retail properties. The clamping down of public places has led to the closure of such areas. However, landlords need to be careful as this would open them up to daily monetary penalties, and tenants may expressly terminate their leases, all within the bounds of the agreement. Therefore, parties should assess the impact of closing these public areas, whether by government mandate or voluntarily.

–         Force majeure

Force majeure excuses the tenant’s responsibility towards paying rent if an event that is beyond the parties’ control occurs. If the lease does not include a force majeure clause, then the tenant cannot benefit under its protection. The pandemic represents a unique situation that would typically fall within the ambit of the force majeure clause. However, some retail leases exclude rent payment from the force majeure clause. Therefore, these clauses need to be considered carefully for the benefit of both parties. 

Under the circumstances of a pandemic, it is quite difficult for anyone to stay calm, especially commercial building owners, but following these tips will help them deal with the problem smartly.

Before acting on any of the ideas presented here, please consult with your tax and legal advisors as there is no one size fits all solution and all of the details need to be considered before making any decisions.

ChicagoBroker.com powered by Jameson Commercial, has been assisting clients throughout Chicago metropolitan area since 1990 in making better commercial real estate lease and investment decisions.

If we can be of service or answer any questions please contact Steven Goldstein at 312-840-9002 or visit www.ChicagoBroker.com for more information.

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