No One Is At Fault: It’s Time To Rethink Our Leases And Loan Documents

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A few weeks ago when COVID-19 kidnapped our blog postings, we wrote about recognizing the differences between individual catastrophes and community catastrophes. As further evidence that Ruminations has little if any influence on our industry, it seems to us that we stand almost alone in the way we are analyzing the current situation. While newspapers, other media, law firms, industry gurus, and general analysis sources are predicting the future from a global perspective – i.e., what will the “new normal” look like; will this coronavirus rear its head again, over and over; will it morph and be with us for a long time to come – the industry blog postings and law firm memorandums we are reading (by the hundreds) seem to focus on weaponization. Yes, how can one of the three: landlords, lenders, and tenants, defend or protect themselves against the others?

Articles about “force majeure” are an example. Those that look backward analyze how clauses written without any thought of a pandemic can be retroactively reinterpreted to provide rent relief. Those that look forward seem to be encouraging that tenants (in their leases) and landlords (in their loans) insist on a provision giving relief either for a pandemic or, in essence, for any situation not anticipated at the time the binding documents are executed. We’ve seen “advice” from respected sources suggesting that, in situations such as what we are all facing today, payment modifications or workouts be treated just like “we always did,” beginning with a review of the payor’s financial statements, business plans, financeability, etc.

This time is different! We are seeing upheaval in the business community, especially in the retail industry, unlike what we’ve ever seen in our lifetime. This isn’t a fire destroying a single store or shopping center. This isn’t a flood destroying a neighborhood. This isn’t a hurricane destroying a local city or community. This is [you fill in this blank].

Currently, this isn’t a situation generally covered by insurance as would be a fire. This isn’t a flood or hurricane or earthquake coverable, in part by insurance. Yes, “pandemic” or “virus” coverage was and is available even though normal insurance policies have expressly excluded losses related to each. But, these were special policies, rarely purchased.

To Ruminations, although the financial turmoil in our industry was unexpected and unplanned for, it falls in a general category that we’ve written about before. Seven years ago, we posted one of these diatribes titled: “In A Lease, If I Didn’t Do It And You Didn’t Do It: Who Should Suffer The Loss?” [It can be revisited by clicking: HERE.] Today, we revisit that issue.

Insurers sell a property insurance product (or policy extension) to cover contingent business interruption. It pays when the insured loses a key supplier or when a nearby revenue-generating source is closed by reason of a fire, etc. Think of what will happen to a hot dog stand across the street from a baseball stadium after fire closes the stadium. Much more commonly, almost all of us carry automobile collision coverage. It pays for repair or replacement caused by accidents even if no one is at fault. [It doesn’t cover the current situation for reasons we won’t revisit today. [You can read about it by clicking: HERE.]

So, while it is reasonable to let the burdens fall on the one who is “at fault,” that’s not going to work when we are facing a community or wider situation or, more commonly, when a third party is at fault. Traditionally, we do that by allocating “risk.” Where insurance is available, one party or the other is able to “lay off” the risk on an insurance “pool,” i.e., to buy insurance. But, when insurance is unobtainable or uneconomical, we (landlords, tenants, and lenders) need to find new approaches, essentially sharing the losses or creating the equivalent of insurance pools.

We’d like to suggest that the first approach – sharing the losses – is fair and socially appropriate. So, we will. But, we’ll bow to skeptics and cynics. So, here’s what we are Ruminating about in our own head.

So, we’ll start off today’s discussions with some ideas – seeds intended to encourage thought. We don’t intend to present a comprehensive list. We don’t even intend to describe comprehensive approaches or expound on theory. What follows are examples intended to inspire our readers to come up with their own approaches. In the past, we have had “Katrina,” “Sandy,” “Harvey,” and “Maria.” Now we have COVID-19. Tomorrow we will have “????.”

Here’s one kind of approach. Let’s consider something some credit card companies offer – a skip a payment feature. Let a tenant who closes its business (or a restaurant that shifts to a take-out-only format) because of a community-wide problem skip one, two or three payments. Allow a borrower to do the same. Build these into our leases and loan documents. Right up-front in the lease or note, raise the monthly payments to cover the possibility of skipped months, and give credit at the end of the lease or loan term for “unused” skips. Or, adjust the monthly payments up-front and just allow a tenant or borrower to skip one month a year (beginning in year two) or to accrue for unused “skips.”

How about requiring a “reserve” component to cover potential rent or loan payment holidays? We see that in serious loans to provide for re-leasing activities or renovation costs. We see this in franchise agreements (especially in the hospitality industry). Why not in leases and loans for “missed” payments?

Where the parties are without fault, why can’t leases provide for drawdowns against security deposits without triggering a default? That would designate those deposits as security for both the landlord and the tenant. Of course, tenants would be expected to replenish those security deposits, but it wouldn’t be a default and the replenishment would be in agreed-upon installments. One feature of such an approach is that it will assist small businesses, the ones who actually post security deposits. Large (often regional and national) tenants generally do not, but most who weren’t failing anyway can cover rent even when their stores are closed.

We can also provide for skipping payments if a personal (or adequate entity) guarantor will cover those payments within “X” months after each skip.

And, we can certainly “split” the loss by allowing for partial payments accepted as full payments during times of community closings (if the tenant actually closes or a landlord actually experiences rent loss). We’re not sanguine that this will appeal to those awaiting payments.

Of course, if and when insurance coverage becomes available, such insurance can be required. While we know that “those who have the gold make the rules,” we still believe that where neither party is at fault, the premium cost should be shared.

Lastly (as always, for now), the marketplace will eventually find its way and we will wind up with a variety of standard or common approaches. Until then, every one of us will need to work out our own arrangements. Whereas this novel coronavirus will go away, others will visit us in the future. While the land beneath the United States has been free of war since Robert E. Lee surrendered at Appomattox Courthouse on April 9, 1865 (though it continued until the fighting ended at Palmito Ranch, Texas, on May 13, 1865), dreadful as it may be to think about, we are not immune to a recurrence. There won’t be war insurance. Even if not widespread as a war might be, let’s remember how long downtown Manhattan was affected following “9-11.” So, this isn’t a hypothetical topic, and adding a “pandemic” clause to our documents is too narrow an approach.

On reflection, what we’ve been thinking about is how parties should be working together to save our industry (and save each other) rather than working on seeking private advantages one over the other. We don’t think we’re promoting altruism. We think we are promoting long-term survival, not only for society and our own industry, but really for each and every landlord and tenant in the long run.

Stay safe.




    As always, an informative and thought-provoking perspective. Thank you.

  2. One of the biggest challenges (among many) that may hamper efforts to come up with solutions is the underlying uncertainty that accompanies this current crisis and, likely, some other, future crisis with which we have no experience. The idea of a rent or mortgage payment deferment is not new. What also is not new is that, when a deferment IS offered/guaranteed/enacted/invoked, it is rarely done on an open-ended basis. Rather, there is commonly a set time frame within which deferred monies are expected to be repaid and within which debtors are expected to resume payments as scheduled. Since we have no historical reference upon which to base a guess as to how long an unprecedented “event” may cause revenue disruption, how do parties realistically forecast and establish a schedule for repayment of deferred monies owed and re-commencement of contractually scheduled payments?

    Many landlords and tenants are coming to agreement on short-term rent deferment/repayment schedules – 2 or 3 months of rent deferred in exchange for …? That, ?, is what concerns ME most. But, as a lease negotiator, I cringe at the idea that a (small) tenant would agree to ANY formal change to the lease arrangement without using the opportunity to address other elements of its long-term occupancy plan. Negotiating outside of the context of the whole is NEVER a good idea, no matter the short-term benefit.

    So, although some relief is better than no relief, tenants should tread slowly and deliberately in order to minimize the impact of a desperate choice that may leave them disadvantaged in the future if they’ve reached the end of the rent deferment period and still can’t pay the rent. Although both sides should strive for agreement that best serves their property partnership, I suspect that small tenants are less likely than landlords to see the consequences of agreements entered into in haste.


    If there is ever to be a balanced way to deal with this in the future, it will only come about if the landlord and tenant communities (however defined) perceive the benefit of establishing a “neutral” ground concept that presupposes that neither is at fault (as you alluded) but that one or both may (potentially) be harmed. I suspect that will be a stretch for all parties, as the survival instinct – in the short run – to collect (landlord) and preserve (tenant) revenue may be more powerful than the drive to work toward the bigger goal of mutual protection of the property partnership. Aha! Maybe, therein lies the kernel of an idea. Perhaps there is a way to take from the MAD (Mutual Assured Destruction) playbook to establish a mutual protection concept that speaks to the idea that protecting and preserving the property partnership is paramount. (Maybe I’m really reaching for an analogy here that may not be appropriate.) But, I’ll take a crack at it. Whenever I’m trying to figure something out, I find that writing is clarifying. So, I just start writing and see what comes out. My analosity (made up word) has led me to try to frame the interdependent, property partnership relationship as a first step towards trying to figure out how to get to a broader concept. Your Ruminations are always insightful. Here are my RAMBLINGS for the day.

    1. The Landlord’s goal is to have a stable, creditworthy Tenant that pays its Rent and Additional Rent (the “Rent”) on time and otherwise faithfully fulfills all of its obligations under the lease to the end that the Landlord has a reasonable expectation that the Rent may be available on a scheduled basis to satisfy and fulfill all of its financial and operational obligations under the Lease and under its other contractual arrangements; and,

    2. The Tenant’s goal is to have a contractually guaranteed place to operate its business within a property that is managed and maintained in a commercially reasonable manner by the Landlord applying the Rent collected from the Tenant for such purposes to the end that the Tenant has a reasonable expectation that it may be able to generate business revenue from which to fulfill all of its financial and operational obligations under the Lease and under its other contractual arrangements; and,

    3. The Landlord’s ability to fulfill all of its financial and operational obligations under the Lease including maintenance and administration of the Property (upon which the Tenant depends) and under its other contractual arrangements is dependent upon the collection of the Rent paid by the Tenant; and,

    4. The Tenant’s ability to pay Rent and to fulfill all of its other financial and operational obligations under the Lease (upon which the Landlord depends) and under its other contractual arrangements is dependent upon Tenant’s ability to generate revenue from the Landlord’s maintained and administered property; and,

    5. The goals of the Landlord and the Tenant as stated above are interdependent (the “Goals”).

    Any new concept will surely have to take that relationship into detailed consideration.

  3. David Ray Ambrose says

    Thank you, Ira, for your perspectives. It is actually affecting how I am viewing recommendations to our private money lender clients on workouts. Your articles are always read with interest.

  4. Steve Cross says

    I agree with Ira (and George Bailey) that sharing in losses is fair – plus, it’s good Karma. In that regard, for some professional and personal services tenants that choose to see clients/customers/patients in their leased space during this pandemic period, I have agreed to accept a portion of the revenue they generate, up to the scheduled rental amount. How much is a ‘portion’?… it depends on relevant variables.

    Tenants will long remember those landlords that stood by them financially during this nationwide crisis – as well as those that did not. As landlords, let’s try to make it ‘a wonderful life’ for all concerned.

  5. Kaido Loor says

    Oioioi. There are arguments I want to dispute:
    1. “Insurers sell a property insurance product (or policy extension) to cover contingent business interruption.” — business interruption indemnity is available after normal property risk (fire, destruction, etc) happens, followed by business interruption. Virus outbreak and measures by gov’t do not trigger business interruption, as no normal property risk took place.

    2. “Of course, tenants would be expected to replenish those security deposits” — if so, the obligation to pay a, say, 3 months rent security becomes an obligation without limits, and runs in parallel with an obligation to pay rent and costs. Normally, security in any relation is limited to something and is not subject to adding on top if the creditor “takes a sip”.

    Very happy to be proven wrong here, and thank you for wonderful ruminations.


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