A way out: New legal actions may open the door to further rent deferrals

by Clay Jarvis09 Apr 2020

According to a new poll of 1,000 small businesses conducted last week by social networking company Alignable, approximately half of small businesses in the U.S. say they paid either no or partial rent in April. It was yet another sign that the commercial sector is in uncharted waters in the wake of COVID-19.

With clarity around commercial rent deferments sorely lacking amongst commercial tenants, many in the sector are no longer wondering if, but rather how and when, a slew of withheld rents will announce itself.

And the anxiety doesn’t just extend to solvent, healthy businesses. Those going through bankruptcy proceedings are hoping to leverage a recently established precedent as a means of their avoiding rent payments.

In March, a New Jersey judge approved a request from Modell’s Sporting Goods Inc. to pause its bankruptcy until the end of April, which allows the company to forgo rent payments. Piggybacking on that decision is Pier 1 Imports, which has asked a judge to free the company of its rent obligations because of the overwhelming external challenges associated with closing stores during the coronavirus pandemic. A decision in the Pier 1 case is pending.

The Modell’s ruling matters for all commercial landlords. Tenants who find themselves going through bankruptcy have historically been expected to pay their rent on time, but the new ruling changes that.

The growing worry among lenders and landlords, who are already dealing with questions around how the coronavirus pandemic relates to force majeure clauses, is that as thousands of retailers now face the prospect of going out of business because of an extended shutdown, more may look to the Modell’s precedent as a way out of paying their rent, at least until the world returns to normal.

And if Michael Sirota, the lawyer representing Modell’s has his way, retailers who find themselves in the same leaky boat as his clients will now ask for those rent deferrals as a matter of course.

“It’s a new world order,” Sirota told The Dallas Morning News. “Any fresh Chapter 11 debtor that files and got caught in the middle of this pandemic should seriously consider hitting the pause button.”