The retail industry has been dealing with the fall out of COVID-19 since March of this year. With state-issued executive orders requiring people stay home and non-essential businesses remain closed for months, many retailers are financially suffering and re-evaluating their rental or lease obligations. While California has permitted more retailers to reopen this past month, the economic consequences of being out of business for weeks to months, as well as reopening requirements, has been a lot for retail tenants to navigate. In this blog post, Los Angeles area commercial contractors H.W. Holmes, Inc. offer a few tips to anyone negotiating a new lease or the modification of an existing lease. This content is for informational purposes only and does not substitute for expert legal advice.
Directly Address COVID-19 in the Lease
There’s been much talk these past few months about force majeure provisions and how they apply to COVID-19. Rather than relying solely on force majeure, it’s recommended that anyone writing up a lease in this climate (as well as moving forward) includes language specifically addressing COVID-19 or a global pandemic head-on.
Keep COVID-19 in Mind for Construction Processes
At the pandemic’s onset, several counties and municipalities in California issued moratoriums on non-essential construction as part of the stay-at-home orders. Even if no such construction moratoriums existed, many government offices were closed. This meant permit processes were slowed due to employees working remote. Public hearings were also canceled. Additionally, construction or building materials have been hard to come by in certain instances.
Needless to say, this has slowed the completion of tenant improvements or build-out periods. Delaying the “build clock” and a landlord’s ability to have the premises ready to open for the tenant. While it’s important to be understanding of any such delay given the circumstances, retail tenants need to open ASAP and can’t be expected to wait too long.
This is why language should now be included in a lease giving a tenant the right to move on to another desired location if the landlord and tenant can’t meet the construction obligations and timeline.
Address Continuous Operation Covenants
Many leases include verbiage requiring the tenant’s business operate for a minimum set number of hours and days. Avoid signing any lease with continuous operation covenants like this in this climate. Require permission to temporary close due to COVID-19 or pandemic related issues. This could be anything from government mandated closures and stay-at-home orders, supply chain interruptions, or an inability to operate your business profitably or safely.
The latter is especially important since any force majeure provision won’t cover a tenant’s inability to be profitable in the midst of COVID-19 or a pandemic. Given that re-opening will come with state mandated social distancing or capacity requirements, some retailers may find that it is impracticable and unprofitable to operate.
Include Rental Abatement Provisions
The majority of force majeure provisions will not relieve a tenant from rent or monetary obligations. Many retailers have unfortunately learned this the hard way during COVID-19. This is why it’s important to pursue a rental abatement provision in your lease that’s triggered if COVID-19 or any other pandemic forces your business to close or reduce its operations.
A tenant’s case when seeking a rental abatement provision is the economic consequences of COVID-19 or a similar pandemic should be shared between the tenant and the landlord. There are a variety of ways to structure this shared risk in a way that’s palatable to the landlord and satisfactory to the tenant. This might be anything from a waiting period before the abatement kicks in, capping the length of the abatement period, a tiered abatement amount, the tenant having a period of time to get back on track after pandemic interference to re-stock the store, recall employees, and re-engage customers), and a mutual termination right that allows either party an out on the lease if the process takes too long.
NEED A RETAIL REMODEL TO REOPEN AFTER COVID-19?
H.W. Holmes, Inc. has steadily become one of the most reliable retail remodel contractors in the Los Angeles area. Through the years, we’ve partnered with many retail clients to create and implement a retail renovation or buildout plan that helps them reach brand objectives and minimizes customer disruption. Contact us today for a free estimate and let us show you the value of adding H.W. Holmes, Inc. to your team.