Lease Payments in the Time of the COVID-19 Pandemic
By Paul J. Welk, PT, JD*
The hope of private practice physical therapists was that the COVID-19 pandemic would be a short-lived bump in the road with a fairly quick return to normalcy.
Unfortunately, that has not proven to be the case. As COVID-19 continues to affect physical therapy private practices and the world economy as a whole, this article will provide readers with options to consider if a practice’s financial circumstances require that it engage in negotiations with landlords with the goal of reducing rent payment obligations.
When COVID-19 first began to have substantial negative effects on the physical therapy industry, many practices considered options to reduce rent expenses as part of a comprehensive effort to reduce or eliminate costs. However, with many private practices taking advantage of the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), PPP borrowers reassessed the benefits of seeking concessions from landlords during the PPP loan measurement period given the terms of the PPP program related to the forgiveness of rent expenses. As the PPP loan program and other government assistance options are now less available to many private practices, practice owners may find themselves reconsidering the need to approach landlords in an effort to reduce the immediate financial burden associated with real estate leases. There are a number of issues that practices need to evaluate as part of this process.
Initially, prior to approaching a landlord to discuss the economic terms of a lease, it is important to review the lease itself to understand the rights and obligations of the landlord and tenant. In general, leases likely do not provide favorable options for the tenant to seek a reduction in rent or terminate a lease early. However, options may exist. For example, if the landlord has been or is unable to provide access to the building or services to which the tenant is entitled under the lease, or if access to the premises is denied due to a government mandate, the tenant may be contractually entitled to a rent reduction under the terms of the lease. Assuming that a reduction in rent is not provided for in a lease agreement under current circumstances, there are still reasons why a landlord may nonetheless consider a request for rent relief absent a contractual obligation. By way of example, a landlord 1) generally does not desire to pursue litigation related to tenant rent defaults; 2) may have mortgage or other lender arrangements that are directly affected by the leases in the building, and 3) generally does not want a vacant location, which, in addition to generating no rent, in some cases could trigger rights of other tenants in a multi-tenant location. When presented with these alternatives, landlords are often incentivized to work with tenants on a mutually agreeable resolution.
However, it is unlikely that a landlord will provide rent relief simply because it is requested by a tenant. Tenants should be prepared to explain the reasons for the request in detail, share financial information about their practice to justify a request for rent relief, and consider the timing of when to approach a landlord. Remember that landlords may own multiple facilities and be negotiating with multiple tenants on rent relief proposals, making the timing of negotiations important.
When approaching a landlord, it is important to understand exactly what you are asking for in terms of rent relief. Two common approaches that tenants have taken during the COVID-19 pandemic are requesting a rent abatement or a rent deferral. A rent abatement involves the landlord agreeing to forgive all or part of the tenant’s rent on a going-forward basis for a period of time, while a rent deferral allows the tenant to not pay current rent but to pay all or a portion of the unpaid rent amounts in the future. When determining the “ask” to a landlord, tenants should consider what, if anything, they are willing to offer in exchange for their request. By way of example, many tenants who have requested rent abatements during the COVID-19 pandemic have agreed to extend the term of the lease for a duration equal to or greater than the requested period of rent abatement. In the case of a request for rent deferral, the tenant should consider in the proposal over what period of time could the tenant agree to repay the deferred amounts. By way of example, a tenant may request a three-month rent deferral, with the repayment of the three months of deferred rent to be made in equal payments over the subsequent 12 months of the lease term (in addition to the tenant paying the then current rent). From an expectation standpoint, the tenant should be aware that it is common for a landlord to require that, if a rent deferral or abatement is agreed upon, the tenant will still be required to pay for any operating costs, property taxes, and other similar items that would otherwise be due under the lease.
When it comes to negotiating rent relief due to the circumstances of COVID-19, if both the landlord and tenant take a reasonable approach to the process and are willing to be flexible, there are numerous ways in which both parties can achieve their primary goals, those being the physical therapy practice having a location to operate its business and the landlord having a financially viable tenant occupying the premises on a long-term basis. Consideration of the above factors should provide a general framework to start discussing the issues.
Paul J. Welk, PT, JD, is a Private Practice Section member and an attorney with Tucker Arensberg, P.C. where he frequently advises physical therapy private practices in the areas of corporate and health care law. Questions and comments can be directed to email@example.com or (412) 594-5536.
Please note that this article is not intended to, and does not, serve as legal advice to the reader but is for general information purposes only.
*The author has a professional affiliation with this subject.