Offer New Uses Rather than Rent Cuts for Tenants Adversely Affected by New Laws

Perhaps the only positive aspect of the COVID-19 shutdowns, at least from a commercial leasing perspective, is how it made landlords aware of just how dependent on their tenants they are. The real winners of the pandemic were the landlords that found a way to work together with tenants to adjust their leasing arrangements so as to ensure their mutual survival. That approach could be the formula for surviving not only public health emergencies but other unforeseen crises that pose a fundamental threat to a tenant’s business. One such threat may come from the enactment of new laws that may undermine the profitability of a tenant’s current use of the leased property.

A case in point is New York City, which is seriously considering enacting a so-called “congestion pricing” law that would impose a very large toll on any car driving into Manhattan. The law would have a devastating impact on the borough’s parking garage businesses, many of whom lease their properties. As a result, parking garage tenants are now seeking to either get out of their leases or receive major rent reductions if the congestion pricing law passes. Of course, such concessions, if they’re granted, would come directly out of their landlords’ pockets. However, adjusting to the new law doesn’t necessarily have to be a win-lose proposition. A veteran New York City attorney has just a fashioned a creative solution: Offer the tenant the right to transition to a new business use within the leased space. Although tailored to parking garage owners and landlords affected by congestion pricing, the same formula and approach could work with any new law that adversely affects a tenant’s current business use of the space it leases from you. Here’s how to create a lease clause that you can use with your own tenants.     

1. Specify the Change in Use Scenario

Proposed change in use of leased space is an extraordinary remedy that tenants should be able to seek only in very limited circumstances. So, the first challenge is to define exactly what those circumstances are. Our Model Lease Clause: Let Tenant Request Use Changes in Response to Adverse New Laws allows the tenant to request a change in use under four conditions:

• The adverse law—in this this case, congestion pricing—is actually enacted and takes full effect;
• The tenant’s revenue falls by 50 percent or other stated amount after the law takes effect, “through no fault of the tenant”;
• The tenant gives the landlord notice of its intent to seek use relief and documentation supporting it no earlier than one year after the law takes effect and no later than 30 days after that; and
• The tenant isn’t currently in default under the lease [Clause, sec. 1].

2. Specify Landlord Review Mechanism and Criteria

Reserve the right of the landlord to review and either accept or reject the tenant’s change in use request. Under the lease clause, the landlord promises not to unreasonably withhold, delay, or condition its decision as long as:

• The tenant hasn’t committed a breach;
• The tenant’s proposed use is permitted under the premises’ current Certificate of Occupancy;
• The tenant gives the landlord at least 60 days’ notice before the start of the proposed use;
• The tenant, at its sole expense, “strictly complies” with all legal requirements relating to the proposed use and secures all required permits, consents, licenses, or certificates of approval;
• The tenant, at its sole expense, “strictly complies” with any and all “rules, regulations, protocols, practices, and procedures” that the landlord imposes relating to any aspect of the proposed use;
• The proposed use doesn’t compete with any other tenant’s use, violate a tenant’s exclusive use, or breach any uses that any current leases in the building ban or restrict; and
• The proposed use doesn’t adversely affect the building’s structure, systems, or reputation [Clause, sec. 2].

3. Get Tenant to Waive Damage Claims

In return for the right to seek permission for a different use, have the tenant waive any claim for damages against you for unreasonably withholding, conditioning, or delaying permission to such use [Clause, sec. 3].  

4. Require Ground Lessor’s/Mortgagee’s Consent

Last but not least, make it clear that the building’s ground lessor or mortgagee might have to give written consent to the proposed use and that you, the landlord, need not approve the proposed use unless and until such consent is provided [Clause, sec. 4].