Is There Leeway in Leases?
Renegotiation, termination and litigation in New York real estate
on March 11, 2021
Updated on March 2, 2022
In March 2020, Lorraine Nadel of Nadel & Ciarlo, a real estate litigation firm in Midtown, was packing up the office to work remotely during the COVID-19 pandemic when the phone rang. And rang. And rang.
“The first matter was a lease I was preparing for a client who was taking gym space,” Nadel says. “My client said he absolutely can’t go forward with it because he’s worried gyms are going to be at risk. I called the other side. It was not taken well.”
Then she heard from clients wanting early termination of residential leases. “At the time, it seemed tenants were leaving the city in droves,” she remembers. “A managing agent told me that almost half their building was empty.”
It was all sudden and all new. “We’ve really never had people wanting to get out of their residential lease for no reason,” she says. It’s usually something, she adds: noise, neighbors, a new job elsewhere. “I mean, they have a reason. These people had no reason.”
Other than the big reason - coronavirus. Which isn’t reason enough. “The lease is a contract, and the tenant is held responsible,” she says.
That said, there are options for renters who want to move out and end a rental agreement.
Three ways to try to get out of a lease agreement
Zixian Qi of the Qi Law Group, who represents both landlords and tenants of rental properties, has tended to see three outcomes during the pandemic: renegotiation, termination and—failing those—litigation. “Most of this is successful to some degree,” she says. “They either got the rent deducted or they successfully terminated the lease. But in consideration, they also paid something to the landlord.”
Both attorneys have spent months examining specific terms of the leases that, until now, were often not relevant—such as the force majeure clause, which releases the tenant from liability because of an extraordinary event. Qi has found, though, that in the language of lease contracts, a pandemic isn’t considered an extraordinary event.
“Most force majeure [clauses] in a commercial lease would be a situation which significantly destroyed the premises,” she says. Nadel did find one client’s commercial lease with a force majeure that released a business being interrupted by “government laws or regulations.” That tenant was able to walk.
The “good-guy clause” became another pored-over element of leases, Nadel says. Since most commercial leases are in the name of a corporate entity, landlords insist on a personal guarantee to make sure a human being is on the hook. Even so, a tenant can be released from the personal guarantee by following specific provisions.
“As an example,” Nadel says, “it could say, ‘If the tenant gives us six months’ notice, pays all the rent for six months, is current on all the terms of their lease, surrenders the keys and leaves everything in good condition, we will completely release them from the personal guarantee.’ They’re not being released from the lease, because that’s in the name of an entity. But the personal guarantee is released.”
Generally, Nadel has noticed that residential clients want to terminate their leases in order to leave the city, while commercial tenants are more likely to renegotiate in order to stay. The latter group has also found more willing partners, since commercial landlords know it’s not as easy to fill the space in the middle of a pandemic. “With restaurants and seriously damaged businesses that couldn’t operate,” Nadel says, “there was more of a willingness to do a rent abatement. With offices, it was more of a deferral.”
Terminating a residential lease for a tenant often requires additional leverage. Nadel cites a sample negotiation from early in the pandemic: “‘We can give you the keys. You can have the space. Otherwise, the tenant is not going to pay, and you’re going to have to take them to court, and we could be a year or more—who knows? The landlord-tenant courts are tough in a good time.’”
She adds: “Sometimes it worked, sometimes it didn’t. … Some wanted a number of months’ rent. The largest counteroffer I got was someone wanting five months of rent to let my tenant out.” Many of these negotiations are ongoing.
As for what the future holds? Nadel, who has continued to live and work in Midtown, feels the city will bounce back. “There’s a lot of pent-up energy for people wanting to go out and live the life they always should have lived,” she says. “Because they didn’t realize it could ever be taken away.”