By Murray Gares, Senior Vice President, Tenant/Buyer Representation
There has been an unprecedented amount of immediate economic challenges as a result of the COVID-19. Tenants of healthcare real estate include medical and dental practices and this sector has not been immune to the impact of the pandemic. Businesses are seeing changes in the short-term and could possibly see a long-term effect in how they conduct their practice such as operational shifts, reduced patient volume and an increase in virtual office visits creating a consequential need to contain expenses.
We may see a strengthening or revision on lease clauses in the future to include pandemic relief language. As a tenant it is important to stay aware of new lease language or clauses that may develop or be revised from this pandemic. For example there are clauses that may be able to be negotiated to provide a tenant the right for early lease termination based on a pandemic event.
One clause that may be affected is the Force Majeure clause, which depending on how the applicable lease language is drafted, gives a tenant the right to be excused temporarily to perform any act (other than the payment of rent) required under the Lease due to certain extreme events such as an act of God, strikes, lockouts, labor disputes and restrictive governmental laws or regulations beyond the control of either tenant or landlord. Another probable future addition to this clause may be specific language referencing a “Pandemic” such as Covid-19 to be included as an excusable event. Including terms in regard to rent abatement or rent deferment is another likely addition to the Force Majeure clause but realize too that with that may come additional term added to the lease.
Business Interruption Insurance
Another clause that may be affected by a pandemic event may be Business Interruption Insurance. Landlords may put the onus back on the tenant to carry Business Interruption Insurance that would cover a Pandemic event such as COVID-19. Since this has never been underwritten by insurance companies, it may be a very expensive insurance rider if and when it comes available.
Continuous Use Clauses
Continuous Use clauses may also be revised as a result of COVID-19. These clauses are typically more prevalent in retail properties but they are seen in medical office leases as well. They require a tenant to use the premises on a continuous basis and non-compliance could result in a lease default. While this clause may not have been a concern in the past tenants may want to consider modifying the requirements in the event of a pandemic.
While we are in the beginning stages of realizing the full impact of future lease language clauses, it is something to be aware of as they will certainly be brought up, discussed and negotiated, and to whose favor is still to be determined. We recommend reviewing your contracts with a trusted commercial real estate professional and attorney as you are negotiating any lease.
To learn more, please contact the Ensemble Real Estate Solutions team, including specialists in healthcare real estate tenant representation. Murray Gares ([email protected]; 602.840.2613) or Tracy Altemus, CCIM ([email protected]; 602.443.4022).