Caution to Tenants: Avoid Incurring New Liabilities While Trying to Address Existing Ones

May 8, 2020

By: Michael N. Samuels

As New York Yankees legend Yogi Berra once famously said, “The future ain’t what it used to be.” While people across the country begin to re-emerge from their homes with the lifting of stay-at-home executive orders, commercial tenants are determining how their businesses will remodel and refortify themselves in our uncertain post-Covid-19 world. Businesses have been severely impacted by the current pandemic, and many commercial tenants are now discovering that they will not be receiving assistance from the Federal Government to help pay their rental obligations. Accordingly, some tenants are now turning to their landlords in the hope of working out rent concession packages to enable them to survive these difficult times and maintain their long -term partnerships with their landlords. In doing so, however, tenants should be careful to avoid incurring new liabilities while trying to address their existing ones.

An early potential pitfall that a tenant may encounter is the form agreement that many landlords are asking tenants to sign in order to enter into discussions about potential rent concessions. While the most productive negotiations between landlords and tenants occur when both parties may speak candidly about the tenant’s challenges and the landlord’s proposals, landlords often ask tenants first to sign agreements as a condition precedent to negotiations (a “Pre-Negotiation Agreement”). Initial drafts of Pre-Negotiation Agreements, which are prepared by landlords, often (i) authorize the landlord to review the tenant’s confidential financial and operational information and discuss it with third parties, (ii) contain a waiver of the tenant’s rights, and a release of the landlord’s liabilities, under the existing lease, and (iii) grant the landlord greater rights than it possesses under the existing lease.

In their haste to begin negotiations with their landlords, tenants can make the mistake of signing these Pre-Negotiation Agreements before properly assessing their import or addressing the problematic provisions. In order to facilitate a meaningful discussion and avoid undue liability, the Pre-Negotiation Agreement should not be one-sided, and instead, it should protect, and be signed by, both parties. For example, tenants should be mindful that since the agreement permits its landlord to review the tenant’s confidential business and operational information, the landlord should be required to sign a non-disclosure agreement as part of the Pre-Negotiation Agreement, so as to prevent the landlord from sharing the information with third parties. Without this protection, a tenant could be exposed to liability from claims by its investors, clients, business partners, employees, and other interested individuals who may be negatively affected if the confidential information is shared with third parties. In addition, tenants should make certain that the Pre-Negotiation Agreements provide that neither the landlord nor the tenant will be prejudiced by having the discussions, and neither party will be deemed to have waived its rights, or released the other party’s obligations, under the lease. Without careful consideration and review, an unchecked Pre-Negotiation Agreement could place the tenant at a significant disadvantage before material discussions with the landlord even begin.

After the parties enter into a Pre-Negotiation Agreement, the parties can discuss various methods of providing the tenant with a rent concession. Some possible options include: (i) the tenant paying a reduced rent for a few months with the amount of the reduction being amortized later in the lease term, (ii) a portion of the existing security deposit being applied to the next installments of rent that are due while deferring the tenant’s obligation to replenish the security deposit to its original amount, or (iii) the tenant paying a reduced rent for a few months in exchange for an extension of the lease term paralleling the time period for which the rent is being reduced. In the uncertain new world that we are entering, it may well be in the tenant’s and landlord’s mutual interest to treat each other as partners and work out a solution that strengthens their long term relationship. It would be a “win-win” if the tenant remains viable and the landlord’s building remains occupied with a stable long-term tenant.

Each modification to one provision of the lease, though, potentially could affect other provisions of the lease, as well as the tenant’s ancillary documents (such as any guaranty, letter of credit, or subordination, non-disturbance, and attornment agreement that may have been provided together with the lease). It is imperative that when reaching a compromise with the landlord, the tenant fully consider the impact on its other responsibilities and rights under the lease and any ancillary documents. In addition, it is also critical that tenants properly memorialize the compromise reached with their landlords in a signed amendment to their lease rather than relying on e-mails or verbal agreements, so as not to later find themselves in a vulnerable position.

As Benjamin Franklin said, “Instead of cursing the darkness, light a candle.” Rather than cursing the difficult situation and challenges caused by this pandemic, tenants and landlords should be working together to find an illuminated path towards a mutually beneficial solution. During that process, though, tenants must be cautious not to stumble into new problems while searching for a remedy to their immediate issues.

If you have any questions, please contact me at (212) 554-7681 or msamuels@mosessinger.com.