These are troubled times. The COVID pandemic is crushing some segments of the commercial real estate industry, including particularly retail and restaurants.
R. Kymn Harp
In COVID-19 lease negotiations, I usually represent commercial landlords. When representing commercial tenants, knowing the challenges landlords face is useful. Commercial tenants should recognize that when seeking rental abatements, or other rent relief, they are proposing to shift the financial burden of COVID from tenant to the landlord. Landlords may want to help; but they may be unable to do so and preserve ownership of their property.
The good news is, there appears to be light at the end of the COVID tunnel. Vaccines are here. The bad news is, we have a long recovery ahead for small businesses and commercial landlords.
The idea that most commercial landlords are “rich people”, large corporations, or REITS who can better weather the financial storm brought by COVID is not true. Most landlords rely on timely payment of rent to pay their mortgages and other expenses of ownership. And, unlike commercial tenants, landlords did not receive direct relief under the federal CARES Act. The forgivable PPP loans to small businesses allow commercial tenants to use up to 40% of the loan proceeds to pay rent. This was designed to help small businesses survive, and to indirectly help commercial landlords by giving commercial tenants funds to help pay rent. Frequently, commercial tenants have ignored this aspect of the PPP loan program.
Strategically, tenants make a mistake when they approach their landlord with a sense of entitlement, and demand rent relief. COVID-19 is not the fault of the landlord any more than it is the fault of the tenant. At a minimum, when asking the landlord for rent relief, a commercial tenant should be prepared to certify to landlord that tenant has suspended distributions to tenant’s owners and investors. The landlord is not the tenant’s business partner. Why should a landlord take a financial hit to enable a tenant to continue to pay tenant’s owners and investors? Landlords have their own financial challenges.
Except in rare occasions where the lease terms provide otherwise, commercial tenants are not automatically “entitled” to rent relief because of COVID-19. It is not a right. If a commercial tenant needs COVID rent relief, it must be willing to be financially transparent and able to make a compelling case to landlord as to how the landlord will benefit by granting the requested relief. Even a compelling case may not be enough if landlord’s mortgage payments, real estate taxes, insurance, utilities, and necessary third-party vendor obligations cannot be paid or abated. Tenants need to provide information to landlord to enable the landlord to likewise make a compelling case to its lender and critical third-party vendors.
Plausible workout strategies may include:
(a) temporary deferral of monthly base rent to be repaid later, with or without interest; or
(b) temporary abatement of monthly base rent in exchange for an extension of the current lease term.
Abatement is a forgiveness of rent. Deferral merely postpones the due date. A landlord will typically need corresponding relief from its lender to help fund the abatement or deferral, and to suspend applicable loan covenants.
Often the best solution is a partial rent abatement (say, for example, a 25% to 50% base rent abatement for a short period) in exchange for extending the term of the lease at full rent. This helps give commercial tenants the rent relief they need in these difficult times, while preserving the value of the property for the landlord – and collateral value for its lender.
Finding a solution that preserves the tenant as a viable occupant and preserves the value of the property for the landlord and its lender is the surest route to avoiding costly and catastrophic litigation.
In March 2015, the Illinois Institute for Continuing Legal Education (“IICLE”) published its 2015 Edition practice handbook entitled: Commercial Landlord-Tenant Practice. To provide best-practice guidance to all Illinois attorneys, IICLE recruits experienced attorneys with relevant knowledge to write each handbook chapter. For the current edition, IICLE asked R. Kymn Harp and Catherine Cooke of Robbins, Salomon & Patt, Ltd., Chicago, Illinois, to write the chapter entitled Tenant’s Duties, Rights and Remedies. We were, of course, pleased to oblige. Although each of us represent commercial landlords at least as often as we represent commercial tenants, a clear understanding of the duties, rights and remedies of commercial real estate tenants is critical when representing either side of the commercial lease transaction.
The following is an excerpt (slightly edited) from our chapter, Tenant’s Duties, Rights and Remedies appearing in the 2015 Edition of IICLE Commercial Landlord-Tenant Practice. We hope you find this excerpt, and the excerpts that will follow, informative and useful. Feel free to contact IICLE directly to purchase the entire volume.
How Commercial Lease Issues Commonly Arise – Getting it Right
Commercial real estate leases, like virtually all documents and agreements relating to commercial real estate transactions and interests, are, to a very large extent, consistent only in their variety. In commercial real estate practice, there are few, if any, “standard form” documents or agreements. To be sure, there are provisions in commercial real estate leases that any experienced practitioner would expect to see, and there are some generally applicable legal concepts that apply, but the variety of issues that may arise — and the language used in each commercial lease — will directly and materially impact the “duties, rights, and remedies” of a tenant under any commercial lease.
The best answer to most questions about what are the rights, duties, and remedies of a tenant under a commercial real estate lease is “It depends.” What does it depend on? It depends primarily on what the parties to the lease — the landlord and tenant — intended, as (presumably) reflected by the express terms and conditions of the lease. However, two common challenges frequently exist, and they apply equally to commercial tenants and commercial landlords. They are (a) poorly written lease provisions that do not clearly and definitively set forth the intention of the landlord and tenant in a way that cannot reasonably be misunderstood and (b) inclusion of perceived “standard boilerplate” provisions in a lease without fully understanding their legal or practical affect on the leased premises, the parties, and the greater project of which the leased premises may be a part. When the intent of the parties is not abundantly clear, a court may find the answer implied by the facts and circumstances.
GENERAL LEASE PRINCIPLES AND RULES OF CONSTRUCTION
A “lease” is generally described as a contract for exclusive possession of land and improvements for a term of years or other duration, usually for a specified rent or other compensation. Urban Investment & Development Co. v. Maurice L. Rothschild & Co., 25 Ill.App.3d 546, 323 N.E.2d 588, 592 (1st Dist. 1975); Feeley v. Michigan Avenue National Bank, 141 Ill.App.3d 187, 490 N.E.2d 15, 18, 141 Ill.Dec. 187 (1st Dist. 1986).
In determining the duties, rights, and remedies of a tenant under a commercial lease in Illinois, the general rules of contract construction will apply. Walgreen Co. v. American National Bank & Trust Company of Chicago, 4 Ill.App.3d 549, 281 N.E.2d 462, 465 (1st Dist. 1972); Feeley, supra, 490 N.E.2d at 18; Chicago Title & Trust Co. v. Southland Corp., 111 Ill.App.3d 67, 443 N.E.2d 294, 297, 66 Ill.Dec. 611 (1st Dist. 1982). Interpretation of a lease is a question of law when the terms are plain and unambiguous. Madigan Bros. v. Melrose Shopping Center Co., 123 Ill.App.3d 851, 463 N.E.2d 824, 828, 79 Ill.Dec. 270 (1st Dist. 1984).
“An ambiguous contract is one capable of being understood in more senses than one; an agreement obscure in meaning, through indefiniteness of expression, or having a double meaning.” Advertising Checking Bureau, Inc. v. Canal-Randolph Associates, 101 Ill.App.3d 140, 427 N.E.2d 1039, 1042, 56 Ill.Dec. 634 (1st Dist. 1991), quoting First National Bank of Chicago v. Victor Comptometer Corp., 123 Ill.App.2d 335, 260 N.E.2d 99, 102 (1st Dist. 1970). However, the mere fact that the parties to a lease “dispute” the meaning of a lease provision and assign conflicting interpretations does not render the provision “ambiguous.” McGann v. Murry, 75 Ill.App.3d 697, 393 N.E.2d 1339, 1342 – 1343, 31 Ill.Dec. 32 (3d Dist. 1979); St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d 285, 695 N.E.2d 503, 506 – 507, 230 Ill.Dec. 1013 (1st Dist. 1998); Ford v. Dovenmuehle Mortgage, Inc., 273 Ill.App.3d 240, 651 N.E.2d 751, 745 – 755, 209 Ill.Dec. 573 (1st Dist. 1995). Whether ambiguity exists is a question of law for the court. Advertising Checking Bureau, supra, 427 N.E.2d at 1042; Pioneer Trust & Savings Bank v. Lucky Stores, Inc., 91 Ill.App.3d 573, 414 N.E.2d 1152, 1154, 47 Ill.Dec. 36 (1st Dist. 1980).
It is well-settled in Illinois that, when construing a written lease, the court must give words their commonly accepted meaning and must construe every part with reference to all other portions of the lease “so that every part may stand, if possible, and no part of it, either in words or sentences, shall be regarded as superfluous or void if it can be prevented.” Kokenes v. Cities Service Oil Co., 24 Ill.App.3d 483, 321 N.E.2d 338, 340 (1st Dist. 1974), quoting Szulerecki v. Oppenheimer, 283 Ill. 525, 119 N.E. 643, 646 (1918). See also Southland, supra, 443 N.E.2d at 297.
In construing a lease, the instrument is to be considered as a whole and the primary object is to derive the intent of the parties. However, a contract must be enforced as written, and when the terms of a lease are clear and unambiguous, they will be given their natural and ordinary meaning. Gerardi v. Vaal, 169 Ill.App.3d 818, 523 N.E.2d 1327, 1331, 120 Ill.Dec. 416 (3d Dist. 1988).
The foregoing sounds pretty straightforward, but unless attorneys and their clients draft leases with a comprehensive understanding of the interplay between particularly drafted provisions and every other part of the lease — including so-called “standard boilerplate” provisions — they may find themselves surprised by what they have “agreed to.”
PRACTICE POINTER
Drafting a commercial real estate lease is similar to drafting any other commercial document, except that the meaning and intent of contractual lease provisions are colored by an extensive body of underlying real property law that has developed over the centuries.
A commercial real estate lease should say what the parties mean and mean what it says. Words have meaning; phrases have meaning; each provision has meaning. The interplay of words, phrases, and all provisions in a lease will help determine the meaning of each other word, phrase, or provision. See Kokenes, supra, 321 N.E.2d at 340; Szulerecki, supra, 119 N.E. at 646.
PRACTICE POINTER
Be sure the words and phrases you use mean what your client believes they mean before proceeding.
If there are provisions of a commercial real estate lease you do not fully understand — including provisions you believe are “standard boilerplate” provisions — you need to learn what they mean and how they affect other parts of the lease, and your client’s rights, duties and remedies, before advising your client to proceed.
The following discussion highlights some areas in which the rights, duties, and remedies of the commercial real estate tenant (and, by mirror image, the landlord) appear not to have been what one or the other party thought they were.
