Regardless of the current COVID-19 lockdowns, retailers are playing a dangerous game if they refuse to pay their lease without landlord cooperation. With big chains like Subway and Mattress Firm telling landlords that they are taking a reduction or even a cancellation on rent, the issue has come to the fore this week.
“These moves mark the next phase in virus fallout: What happens to billions in rent owed for businesses that have been closed?” says Bloomberg. “The stakes are high. Retail has a slew of big chains in turnaround mode. And if they do withhold payments, there would be a ripple effect. Landlords can’t afford to stop collecting rent for long, with many property owners sitting on loads of debt.”
Bloomberg and others believe the situation will escalate. The federal relief packages that have been approved by Congress don’t directly address rents. But the Federal Reserve could give banks the latitude to defer mortgage payments therefore allowing property owners to delay rent. At this point it’s unclear an “act of God” applies. If retailers can invoke “force majeure,” landlords could apply the same to banks.
Each retail lease, regardless of the company’s size, will have its own unique elements regarding “force majeure” and may not even contain that clause. Legal experts have urged communication and negotiation over straight up refusal to pay. There’s no shortage of legal firms that have provided valuable information for retailers who lack legal staff or retainers.
In some cases it’s useful to look at the controversy from the landlord’s point of view. If retailers cannot pay rent as a result of COVID-19 pandemic, landlords will need to weigh legal and business issues that affecting their right to evict tenants, according to legal firm HansonBridgett, writing in JD Supra. At this point, landlords may find that eviction is not the best option. Landlords may find it more useful to negotiate with tenants for the possibility of rent reductions or rent forgiveness for a period of time. Or rent could be deferred and spread out over the lease term, similar to refinancing a mortgage. The firm warns that the ability of a landlord to negotiate may depend on its ability to exact concessions from investors or lenders.
“In the end, it should not become the job of property owners and landlords to subsidize the losses caused by COVID-19, nor should the COVID-19 pandemic be a catalyst to significantly impinge upon the right of owners and landlords to protect their assets and investments through eviction or otherwise,” the firm stated. “Wide-scale evictions during a time of crisis, however, will not serve the interest of anyone. So, while these rights may be limited in the short term, hopefully all parties (landlords, tenants, governments, the business community, and individual consumers) can use that time to both ensure the pandemic is behind us and take steps to soften the financial impact of the crisis for everyone.”
The potential ramifications of rent forgiveness or default at retail is just starting to be considered. “This, more or less, is the catastrophic ‘domino effect’ that real-estate investor Tom Barrack, chief executive officer of Colony Capital Inc., warned about this week,” said Bloomberg. “Simply put, if commercial tenants don’t pay rent because of a lack of cash, then property owners might be squeezed and default on their mortgage payments. The same goes for homeowners. That could bring the problem squarely onto the balance sheets of large U.S. banks, which will suffer steep losses on their loans.”