Covid-19: April Rent

COVID-19 has caused major disruption in the business world, perhaps most severely in the retail industry.  One of the biggest issues facing many retailers is what to do about paying rent during a time when they are not earning revenue and are continuing to incur substantial labor expenses and other operational charges.  Likewise, landlords—who must continue to pay their lenders, property managers, utilities, insurance, and property taxes, among other property expenses—are contemplating what to do to prevent retailers from failing to pay rent en masse, and to prevent temporary closures from turning into permanent vacancies once normalcy returns.  The new CARES Act should help many small businesses with fewer than 500 employees offset some of their expenses in the short term, but it is not clear what help will be available for national retailers that often have a bigger workforce.  Regardless, even with the help of the CARES Act or future legislation, no one expects that retailers will recover the revenue lost as a result of the closures, which may continue for an extended period of time.

Some landlords, perhaps recognizing they don’t have much of a choice, have opted to offer their tenants rent deferrals for up to 90 days. Others have offered full or 50% rent abatement for the month of April.  Still other landlords are offering to abate rent for 30 days or longer, in exchange for a matching extension in the length of the lease term. In any case, all landlords are proceeding cautiously.  Many have expressed concerns that their agreement to provide rent relief to a few select retailers will leak to the public resulting in all of their tenants expecting (or demanding) the same deal.  Consequently, many landlords, while ultimately open to providing some rent abatement, are reluctant to agree to anything more than rent deferrals, opting to take a wait-and-see approach before committing to waive any rent.  From the retailers’ perspective, rent deferrals are nice to have (and sometimes critical) to help with immediate cash flow and liquidity issues, but they don’t go far enough.  Retailers stress the fact that they will never be able to recover their lost revenues for the time they were closed; deferring the rent does not address this main problem.

Landlords may choose to address these issues differently depending on the retailer.  Some retailers will need rent deferrals and likely rent relief simply to survive.  Others, such as Apple, with billions of dollars of cash on their balance sheets, can withstand this crisis for the next few months, although they too are suffering substantial revenue shortfalls and will need some relief to help offset their losses. These stronger retailers do not want to be punished for their own successes and subsidize other tenants’ rent by paying in full if everyone else is only paying 50%.

Landlords have been inundated by requests or demands for rent relief from their tenants.  To manage this massive undertaking, landlords have set up task forces, sometimes through their lawyers, to process these requests.  Rumors are spreading that many landlords are giving rent abatement to anyone who asks.  That is simply not true, at least not yet.  While there are several legal arguments for each side in determining whether rent is actually due as a result of COVID-19, at this time, the best course of action may be to try to resolve these issues at a business level.  In real estate, personal relationships between landlords and tenants matter greatly.  The key is to continue to communicate with each other.  If parties cannot come up with a business resolution, there will be time to file lawsuits and address these issues on a legal basis.

COVID-19’s impacts on the retail industry is rapidly changing on a daily basis.  By the time you read this, things may have drastically changed, rendering much of what is said here obsolete.  We are continuing to monitor the situation and will provide updates to our clients as the situation evolves.  Stay safe and healthy!

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