Commercial leasing is a complex process that typically involves sophisticated parties on both the tenant and the landlord side of the deal.

And in the midst of a pandemic, commercial landlords in Texas and across the nation are now grappling with tenants failing or refusing to make rent payments.

Large Commercial Tenants May Have an Unfair Advantage

The key terms of a commercial lease, such as the length of the lease, the rental amounts owed, the ability of either party to terminate the lease, and “force majeure” clauses are all deal points heavily negotiated with the assistance of lawyers.

And unlike residential leasing, where the landlord almost always possesses the greater economic and bargaining power, in a commercial lease, it is often the tenant has that power.

The Impact of COVID-19 on Commercial Landlords

The massive bargaining power and economic advantage often possessed by a large or national tenant has come to the forefront during the COVID-19 pandemic.

There has (understandably) been significant press coverage devoted to laws designed to protect residential tenants from evictions.

But large commercial tenants, who are able to continue to pay rent but have simply stopped paying or have opportunistically used the pandemic to extract better lease terms, have mostly flown under the radar.

This situation is happening in real time, and it is happening frequently.

Smaller Landlords Are Struggling

A common public misconception is that the landlord is always the proverbial “800-pound gorilla” in a leasehold relationship. This is often simply not the case.

To be sure, there are institutional landlords such as real estate investment trusts (REITs) that have large portfolios of real estate. But in many instances, the owner of the real property being leased is a small, family-owned (or otherwise closely held) business.

Often, the real property being leased is the only real estate asset owned by the landlord, and a major source of their revenue.

Anchor Tenants

Although some landlords may own the property free and clear, most have mortgage obligations that are not excused simply because a large tenant has stopped paying rent.

Perhaps the most common situation like this is a strip center with one “anchor” tenant and other, smaller tenants.

On the other side of the equation, it is often the case that the “anchor” tenant is the party that is well-equipped to withstand a downturn (or a shutdown due to a nationwide pandemic).

Large regional or national restaurant and retail brands strategically seek out smaller landlords over whom they can exert more favorable lease terms.

Commercial Tenant Defaults Leave Landlords in a Tough Spot

Despite contractual requirements in commercial leases requiring timely rent payments, many large tenants have begun refusing to pay rent during the pandemic.

And despite the lease’s prohibition against abandonment of the premises, some tenants have simply left and relocated to a different property where they could extract better lease terms.

In the lead up to this abandonment, many tenants have sought more favorable rental terms from landlords. But not every landlord can agree to a rental abatement or reduction, especially if the landlord is not getting any relief from their mortgage bank.

It’s a double-edged sword: on one hand, the tenant is refusing to pay the agreed amount because business has slowed or dried up altogether.

On the other hand, the mortgage holder bank is still demanding payment. This leaves commercial landlords in a very difficult position.

Force Majeure Clauses

One common tactic some commercial tenants have been employing to get out of their lease obligations is to invoke the lease’s force majeure clause.

What Is Force Majeure?

Traditionally, a force majeure clause in a commercial lease excuses the tenant’s performance if a certain “act of God” occurred, such as an extreme weather event.

Some force majeure clauses have been deemed to include actions attributable to human behavior, such as governmental actions, actions of war or terrorism, labor strikes, rioting, or other defined activities.

Do Force Majeure Clauses Include Pandemics?

Very few clauses include a pandemic as a force majeure event.

Depending on the language of the applicable force majeure clause, a tenant may argue that COVID-19 constitutes an event that triggers the clause, and thus excuses the tenant’s performance under the lease.

Most Commercial Leases Don’t Excuse Rent Payment Obligations

Most force majeure clauses in commercial leases, however, expressly exclude payment of rent as one of the obligations excused.

That is, even if a business cannot remain open to sell its product or provide a service – a requirement under a typical lease that might be excused by a force majeure event – most leases will still require full payment of monthly rent.

And so even if COVID-19 is deemed a force majeure event, depending on the language of the lease, this is unlikely to excuse a tenant’s payment of rents.

What Can Commercial Landlords Do If Tenants Stop Paying Rent?

Commercial landlords left in a lurch after a tenant stops paying rent are sure to wonder what the best next step is.

Review the Lease Terms

As noted above, since most commercial leases are heavily negotiated, it is important to carefully review the terms of the lease. Every lease is different, and you must pay careful attention to a specific lease’s terms.

Declare Default

Once a tenant stops paying, the landlord should consult the provisions of the lease governing events of default.

The lease is certain to deem nonpayment of rent – an essential term under any lease – an event of default.

Once the landlord declares default and gives proper notice of that default under the terms of the lease, they will have several options.

Mitigation Requirement

Once a tenant has abandoned the premises, most states’ laws require a landlord to take “reasonable efforts” to mitigate their damages.

This mitigation requirement means the landlord must try to find a suitable replacement tenant. And in some states, including Texas, any clause in a lease purporting to waive or exempt a landlord from this requirement is void.

For all options after termination, including those listed below, the landlord will be required to try to use reasonable efforts to find a replacement tenant.

Option One: Terminate the Lease

One option may be to terminate the lease altogether, and demand payment of unpaid amounts, the landlord’s costs, and amounts owed for the remainder of the lease term.

Especially with longer-term leases (i.e., more than a year), this option is likely to require a reduction of future rents to net present value and account for whatever reasonable rents the landlord could get from a replacement tenant.

The calculation would look like this:

Total amount owed by tenant to landlord =
Past unpaid rents
+ Landlord’s costs incurred in connection with the default
+ Future rents owed (reduced to net present value)
– fair rental value of the premises at time of termination

This option absolves the tenant of any monthly ongoing rent obligation, but it allows the landlord to recover all amounts owed in the future, reduced to net present value, without waiting for the lease term to lapse.

This option may be attractive to a landlord during COVID times because it is possible (if not likely) that the current “fair rental value” of the premises is lower than the amount specified in the lease.

Ideally, of course, a replacement tenant would be committed for most (or all) of the future rents owed.

In a hot market, a replacement tenant could even fetch more than was owed under the current lease, which would result in zero future rents owed by the abandoning tenant.

But when the market dips, as it has during COVID, that is simply not a likely reality.

Option Two: Terminate the Tenant’s Right to Possession

Another option to terminate not the lease, but the tenant’s right to possess the premises (essentially, locking the tenant out). Under this option, the tenant will still be responsible for monthly rents as they come due.

This gives the landlord the option of continuing to declare the tenant in default for each month it fails to pay, and to seek the entire amount owed as it comes due (minus any rents obtained by a replacement tenant).

The calculation here would be a bit simpler than option one:

Total amount owed by tenant to landlord =
Past unpaid rents
+ Landlord’s costs incurred in connection with the default
+ Future rents owed (no reduction to net present value)
– actual rents collected by replacement tenant (no reduction to net present value)

The downside to this option is that the landlord must wait each month (or whatever the period of time rents are collected) to collect that period’s rents.

But the upside to this approach is that if the landlord cannot find a replacement tenant, despite reasonable mitigation efforts, they can continue to collect the full rental amount from the tenant without a reduction to net present value.

Option Three: Enter and Take Possession and Evict Tenant

The third option is much simpler: the landlord, consistent with other laws, may change the locks and expel the tenant.

Under this option, the tenant no longer has any obligation to pay rent but cannot occupy the premises.

Practically speaking, under any of these three options, the best case scenario is for the landlord to obtain a replacement tenant at a rental rate (and for a term) close to what the landlord was already getting from the abandoned tenant.

But different landlords might have different financial realities, so each option offers potential upsides and downsides. An attorney can help you decide the best next move.

Contact Raizner Law to Discuss Your Commercial Lease Dispute

Businesses face myriad issues right now, including commercial landlords struggling with tenants that have wrongfully delayed, not made rent payments, or broken their leases entirely.

Raizner Slania has years of experience representing commercial landlords in Texas and around the nation.

If you are a commercial landlord dealing with a large or national tenant that is delaying or refusing to make rent payments at the expense of your business, you may be able to pursue litigation in order to receive compensation.

Contact the attorneys at Raizner Slania today to discuss your needs and start building a case.

844-554-9099

Commercial Lease Dispute Attorneys