COVID-19 and Commercial Rent: No to One-Size-Fits-All Solutions, Yes to Case-by-Case Negotiations!

In light of the growing number of cases involving unpaid rent by residence operators, the law firm Goethe Avocats is calling for case-by-case negotiations on a residence-by-residence basis. This is the only way to quickly stabilize the situation and protect landlords from imposed and completely unjustified concessions.

After a brief period of shock, the operators of managed residences were quick to react, as a significant number of them very quickly stopped paying the commercial rent owed to investors (these are primarily hotel, tourist, and business residences).

Thousands of letters were sent to the investors announcing the “good news,” justifying the decision legally with every possible—and (above all) any—argument, while providing little or no guidance on the unilateral action they were taking.

In their defense, the situation we are experiencing is unprecedented in modern times, and we must acknowledge that it is extremely difficult—if not impossible—to predict what tomorrow will bring.

Nevertheless, time and again, the solution chosen by operators in the face of difficulties is to stop paying rent, which they clearly view as the adjustment variable for their operations.

As usual, operators of managed residences view their landlords (when the need arises) as their bankers responsible for financing their operations, or as their partners who are supposed to bear the business risks.

Rather than seeking a loan from their bank or a recapitalization from their shareholders, they have therefore chosen—almost reflexively—to confront their difficulties in the face of COVID-19 by ceasing to pay rent.

While the principle itself is highly questionable, the real problem lies more in the widespread nature of this reaction.

While stopping rent payments may be understandable when a property is closed by administrative order—or perhaps when it is closed due to a complete lack of business—the situation is different when it continues to operate.

How can one justify stopping rent payments at a tourist residence that generates all of its revenue in the winter or summer, given that the timing of the crisis works in its favor?

Similarly, how can one legitimately stop paying rent at a senior living facility where occupancy has not declined?

Every situation is obviously different, and in reality, very few actually justify—from an economic standpoint (not to mention a legal one)—a suspension of rent payments.

“There is no justification for landlords to be the only ones making sacrifices.”

It is unfortunately clear that many co-owners are benefiting from a windfall effect linked to COVID-19, which cannot be tolerated.

This is one of the reasons why, in light of this situation, we believe that any comprehensive resolution of the issue—whether through “general agreements ” concluded by associations that have proclaimed themselves representative of landlords, or by means of sector-specific ordinances, would constitute a major mistake of which landlords would be the victims.

We advocate for case-by-case negotiations, residence by residence, as the only way to quickly stabilize the situation and protect landlords from imposed and entirely unjustified concessions.

These negotiations must, broadly speaking, be based on the following principles:

– Analyze the residence’s operational situation and assess whether the difficulties cited are genuine and substantial enough for landlords—whose interest is naturally not in the operator’s bankruptcy—to accept concessions regarding rent.

– If concessions must be made:

• They must be strictly limited in time and, above all, must not be based on complex mechanisms for adjusting rent over several years; this will almost inevitably lead to litigation and create uncertainty that will drain all liquidity from the property;
• They must be accompanied by something in return. There is no justification for landlords to be the only ones making sacrifices.

Any other approach to resolving the issue would constitute yet another injustice toward landlord-investors and would be extremely concerning for the future.

We will devote all our energy and expertise to ensuring that the solution involving case-by-case analysis and negotiation is adopted.

Investors who are landlords in managed residential properties (tourist residences, hotels, commercial properties, nursing homes, senior living facilities, student housing, etc.) need to be defended now more than ever.