If a tenant is seeking a loan under the Payroll Protection Program of the CARES Act (a PPP loan), it may be advantageous for both parties to have the rent deferral begin after the PPP loan period has ended. Payroll Protection Program Considerations The acceleration provision at least gives the landlord the argument that the deferred rent should be included in this calculation (although there is no guaranty that a bankruptcy court would agree). In such a case, a landlord may be limited to seeking damages based on the loss of rent for a given period of time. Among other things, this acceleration of deferred rent provides the landlord with the greatest potential claim for damages, particularly if the tenant files for bankruptcy. The forbearance agreement should provide that if the tenant defaults at any point after the agreement is in place all deferred rent is automatically accelerated and becomes immediately due and payable with interest (note that, in this instance, the default interest rate is appropriate). This makes repayment more manageable for the tenant and takes into consideration the potentially long glide path the tenant may need to get back up to full operations and revenue stream. For example, three months of deferred rent might be repaid over a period of six, eight, or 12 months or more. The period during which the tenant is required to repay the deferred rent need not be the same period as the deferral itself. If interest is to be charged, consider having the interest rate reflect (at a minimum) the landlord’s cost of funds at a market interest rate and accrue from the date of deferral until repayment. This rate is typically at an above-market rate and may not be equitable in the current situation. ![]() Many leases contain a penalty interest rate that is applicable to amounts a tenant may owe while in default of the lease. We have seen landlords start off with an offer of a three-month rent deferral period, with the possibility of revisiting the issue once that period has expired.Ĭonsider whether the deferred rent should accrue interest and, if so, at what rate. While this is certainly an inexact science, the parties will need to take into account not only the period during which the tenant is not permitted to operate, but also a potentially extended reopening period during which the tenant may need to slowly ramp up to normal business operations. The parties will need to determine what length of deferral is appropriate. This places the landlord at a disadvantage if it becomes necessary in the future to seek damages from a defaulting tenant (as the abated rent may not be included in the damages calculation). By styling a document as an abatement of rent, the landlord risks giving up the rent entirely for that period of time. ![]() Rent payable during a given period of time may be deferred until later in the lease term, and amortized over a longer period of time, in order to allow the tenant an opportunity to get back on its feet before it is required to start repaying the deferred rent. Consider whether there are circumstances that would militate in favor of one form or the other.įrom a landlord’s perspective, it is better to defer rent than to abate it entirely. A separate forbearance agreement can also be used that may be styled in a manner that technically does not amend the lease. However, this need not necessarily be the case. Most forbearance arrangements will likely take the form of an amendment to the lease. Below are a variety of issues and provisions landlords (and tenants) should consider when crafting a lease forbearance agreement during the COVID-19 crisis.Ĭonsider what form your agreement should take. Some landlords are considering abating or deferring rent for some limited period of time to give the tenants a respite until their business operations improve. Some landlords are looking for ways to provide their tenants with temporary relief to help them through this challenging period. ![]() As retail businesses around the country begin the process of slowly restarting after the COVID-19 shut down, many tenants still find it difficult, if not impossible, to meet their rent and other financial obligations.
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