By: Brooke Pollard, Esq.
Whether you are the landlord or the tenant, here are 4 legal issues to consider when re-negotiating commercial lease terms.
- What do local ordinances say about your obligation to renegotiate and/or terminate a lease for failure to pay during these times? For example: We represent a landlord that owns a shopping center in the South Bay. One of the tenants is a bar, which doesn’t serve food. It has been closed since March. The bar hasn’t paid rent in April, May, June or July. The landlord is concerned that the tenant may never be able to repay the rent, and the tenant doesn’t appear to be interested in repaying the back due rent. The city in which the shopping center is located had a moratorium on evictions but it was later rescinded. The city, therefore, is relying upon the state and county orders that are in place. The state of California doesn’t have any specific prohibitions on 3 Day Notices but Los Angeles County does for any cities who do not have their own moratorium in place. LA County makes it a misdemeanor to harass a tenant, which includes serving a termination notice. Any notice attempting to terminate a tenancy is considered null & void. These rules only apply to tenants affected by COVID-19, both commercial and residential. They do not apply to evictions to protect the health and safety of the community. These rules are in place until July 31. We shall see if the Los Angeles County Board of Supervisors extends these restrictions beyond July 31, but it seems like they will since the Governor’s order allows them to extend to September 30th. If the county does not extend the restrictions beyond July 31 we may be able to assist the client with providing a 3 day notice, but, as of today, we are advising against it. Knowing how all of these emergency orders will affect the ability of the landlord to remove a tenant are important for the landlord to decide how to handle the tenant negotiations.
- Who needs to be notified of the changes to the terms? If there is an encumbrance like a mortgage on the property, does the landlord have an obligation to notify the bank before changing the lease terms? One of my clients has the following negative covenant in its loan agreement with the Lender: Borrower shall not “enter any proposed leases, lease renewals, lease amendments and lease modifications thereof without the prior approval of Lender.” Does the lease modification require approval of the lender?
- Relative Bargaining Power in Negotiations. Is there something else that can be gained as part of the lease renegotiation? Maybe the termination of an option that was substantially favorable to the tenant, or a confirmation that notwithstanding the breach for failure to pay the tenant won’t be deemed in default for inducement recapture. Maybe now is when a landlord can get a guaranty it was otherwise unable to obtain.
- REVIEW THE LEASE! It sounds silly, but it is surprising how often the lease isn’t complete, neither party has a fully executed version, or it references legal entities that have changed without assignment. Make sure that you have the lease, all of the amendments, the guaranty, etc. Is the lease still with the correct parties, have there been changes, is the copy you have signed.