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January 11, 2021 Experts Corner

A brave new world of commercial leasing

Geoffrey F. Fay
By Geoffrey F. Fay

Just a year ago, commercial property owners were focused on providing amenities Millennials wanted in order to attract companies that employ them.

Devoting additional square footage to a state-of-the-art gym, recreation room or coffee shop was a sound investment despite the resulting loss in rentable area. In the world of commercial real estate the term “experiential” was used by brokers to promote a building.

In 2021, concerns for health and safety will likely eclipse the importance of tenant amenities. As a competitive differentiator in a difficult market, owners of Class-A office buildings are now providing a high level of detail documenting steps they are taking to protect tenants from COVID-19.

After-hours ventilation; better filtration

Most office leases specify the operating hours for a building’s HVAC system. Tenants can expect landlords to provide, at no extra cost, heating and cooling roughly during normal 8 a.m. to 5 p.m. business hours, but tenants must pay extra for after-hours HVAC service.

Even in Class-A buildings, those working evenings or weekends might find themselves chilly or warm unless their employer is willing to pay for after-hours HVAC.

However, what was once merely uncomfortable may now be dangerous. Since COVID-19 is primarily transmitted through air droplets, increased ventilation and improved air filtration is the key to reducing risk.

With the HVAC system offline, air stagnates.

Previously, negotiations of the HVAC lease provision focused on the periods and costs of maintaining a comfortable temperature. Now negotiations will additionally address the quality of air filtration and the allocation of the costs of extended ventilation periods.

Beyond cleaning

When the pandemic hit, many landlords increased their cleaning schedule. Now that we know more about how the virus remains on surfaces, office leases should include more specificity about cleaning than previously considered.

The Centers for Disease Control and Prevention defines “sanitizing” differently than “cleaning,” and it’s the former that’s needed to kill the COVID-19 virus. Before 2020, I never saw the word “sanitize” appear in office lease standards. Today, that’s the word tenants want to see.

They want to know that door handles, buttons, restroom fixtures, and any other touchpoints are being sanitized many times per day.

Force majeure redefined

At the onset of this pandemic, businesses took a fresh look at their business interruption insurance policies and most learned that, subsequent to the SARS outbreak in 2002, carriers excluded losses from pandemics from most policies.

These days, force majeure — specified circumstances beyond one’s control that may temporarily relieve a party’s performance of a contract obligation — is no longer brushed aside as “boilerplate” lease language. Force majeure clauses now require more thoughtful negotiation, which often involves the landlord’s lender, because it potentially imperils a dependable rental stream and shifts a new risk to landlords and lenders.

This pandemic has taught us that tenants need flexibility that force majeure clauses can’t address. If remote work is viable for one business, a right to reduce the size of the leased premises should be considered.

If remote work is not viable, a right to expand should be considered so employees can be adequately spaced.

The distribution of effective vaccines should be celebrated. But the concerns people will have about returning to office towers with crowded lobbies, elevators and cafeterias will remain, so lease provisions addressing building operational and maintenance standards warrant a fresh look.

Geoffrey F. Fay is a real estate attorney with law firm Pullman & Comley

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