Legal Developers

Mitigating the Economic Effects of COVID-19 Forbearance Agreements and Commercial Leases

As the economy rallies to rebound from the COVID-19 pandemic, landlords continue to receive requests from tenants for rent relief. Landlords are accordingly forced to balance the need to meet their own financial obligations with providing assistance to their tenants to ensure that they remain in business.

One way to address this issue is by way of a forbearance agreement. A forbearance agreement is a contract separate from the lease agreement whereby the landlord agrees to modify the tenant’s rent schedule and to temporarily abstain from prosecuting its rights under the lease in exchange for a guarantee and/or other consideration from the tenant. A forbearance agreement may be entered into either before or after a tenant defaults.

Before entering into a forbearance agreement, the landlord should request sufficient documentation as to the tenant’s then current financial condition such as cash reserves and profit and loss statements. The tenant should have an obligation to periodically update this information during the term of the forbearance agreement or even during the remainder of the lease term. Landlords should check their own mortgage documents as to whether their lender’s consent is required to enter into this type of agreement. If consent is required to modify the lease agreement, consent will be required for the forbearance agreement. Lastly, if the tenant is pursuing or receiving a loan under the Paycheck Protection Program (“PPP”) of the CARES Act, it may be best to have the forbearance agreement commence after the loan period is complete or in the alternative, the landlord may condition the forbearance agreement on the application by tenant for PPP benefits (if still available) and may further require the receipt of any PPP financing for rent to be immediately paid to the landlord.

The forbearance agreement benefits the tenant by giving it a temporary or permanent reduction in rent, a temporary waiver of rent or a deferment of all or partial rent. Additionally, the landlord will agree not to seek the remedies that it is entitled to under the lease so long as the tenant complies with all conditions under the forbearance agreement.

The landlord, in consideration of it granting such benefits to the tenant will often require: (a) additional security, such as a personal guaranty; (b) that the tenant forgo any lease options such as a renewal right, an expansion right or the right to assign the lease to an affiliate; (c) interest on the deferred rent; (d) a clear written acknowledgment by the tenant of its default and (except for the forbearance agreement) that it has no defense or offset to the enforcement of the landlord’s rights under the lease; (e) the acknowledgement by the tenant that if it defaults under the forbearance agreement, rent (or just the deferred rent) will immediately accelerate and that the landlord may seek all other remedies available to it as a result of the original default; (f) a lien on the tenant’s personal property; and (g) an indemnity provision and release language in favor of the landlord.

Please contact our Obermayer team to learn if a forbearance agreement is the right tool for you and your tenant for temporary relief during these unprecedented times.

The information contained in this publication should not be construed as legal or medical advice, is not a substitute for legal counsel or medical consultation, and should not be relied on as such.