Articles

Strategies for Coping with Your Office Lease in the Era of COVID

Date: February 3, 2021
The COVID-19 pandemic has upended the traditional workplace in significant ways and created countless concerns for commercial office tenants, including associations and other nonprofit organizations.  This article will detail the extent to which tenants can address these concerns within the framework of existing lease terms and conditions, as well as possible solutions and strategies for dealing with property owners. 
             
First and foremost, it is critical to know that, if your organization decided to permit employees to work remotely from home, it does not mean that the organization has the right to abate rent.  The obligation to pay rent is a separate covenant under the lease and not occupying the office due to stay at home directives does not excuse payment of rent.  Landlords use rental payments to pay mortgage debt, operating expenses, insurance and real estate taxes. 

Not occupying the office does not trigger the right to suspend insurance covering the office, nor does it alleviate the requirement to maintain the office space.  The respective non-monetary lease obligations of the parties remain in place, except for any obligation to occupy the premises.  Likewise, landlords are required to perform their obligations and furnish the basic services required to be provided by the landlord under the lease, which include (depending on the type of lease) heat and air-conditioning, water, electric, elevator, and janitorial service, as well as maintenance and repair of common areas and building systems.  If the landlord is failing to provide the required services, the organization may have a right to declare the landlord in default. However, it is always important to pay rent on a timely basis and the pandemic does not automatically excuse that absent special circumstances (for example, a retail establishment that lost significant business might have a force majeure defense to a claim for breach of contract for failure to pay rent, but leases with associations and nonprofit organizations likely do not afford this opportunity.

If your organization is suffering financially due to the pandemic, you might want to consider approaching the landlord and propose a rent deferral (not an abatement, which few landlords would agree to), meaning that during the pendency of the pandemic when your business income is diminished, an alternate amount, such as one half the rent, could be paid.  The property owner may agree, provided the deferred half rent is paid back in monthly installments (without interest) when employees return to the office.

Once you are ready to have employees return to working in the office, consider whether you have open space or “bullpen” type shared work areas that may need to be altered to create private offices or cubicles.  Many landlords may agree to subsidize tenants with a portion of the costs of making alterations to these open bullpen type areas to accommodate social distancing.

If your organization is significantly and permanently impaired by the pandemic, landlords may consider negotiating an early lease termination agreement.  These agreements typically will require the tenant to pay a hefty termination fee comprised of unamortized lease transaction costs (i.e, brokerage commissions, rent abatement granted as a concession for leasing the space, and tenant improvement allowance or cost of landlord’s work).  The lease may already have an early termination option included as part of the original negotiation and your board will need to determine if it is in the best interest to exercise this type of termination option.

Other strategies for negotiating a reduction in the monthly lease costs may include:
  1. Subleasing all or a portion of the space; however in these times with so many businesses wanting to get out of leases, there is not much of a market for subleasing and attempting to sublease may require broker representation; 
  2. Some landlords may agree to reduce rent for the duration of the term of the lease in exchange for the tenant agreeing to extend the term, as landlords become concerned about a possible future glut of available office space which will drive market rents down; and
  3. If your office space needs will forever be reduced due to many employees deciding to permanently work remotely, a reduction in the square footage of your space is a possible negotiating strategy either through a relocation or simply by constructing a wall to reduce the size of the office.  This permits the landlord to lease the unused space to another tenant.
It is important to keep in mind that property owners are also adversely impacted by the pandemic’s effect on commercial real estate and are generally willing and able to negotiate with their tenants who pay rent timely in order to maintain cash flow to the building.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.