Many businesses did not pay rent or paid partial rent in April 2020, because of the COVID-19 pandemic. Under certain circumstances, a Lessee that is not complying with the AIR CRE Leases can lose the right to exercise its Option To Extend the Lease term. If a Lessee failed to pay rent for April 2020, does Lessee automatically lose any Option To Extend it may have in its Lease?
Short Answer: No, there is no automatic forfeiture of the Option To Extend for failure to pay rent. If Lessee becomes current at the time of exercise, it retains its ability to exercise an Option. After timely exercise of the Option, but before commencement of the Option period, unpaid April 2020 Rent can cause termination of the Option, as described below.
If Lessee Fails To Pay April 2020 Rent, But Becomes Current At the Time of Exercise of the Option, Lessee Can Exercise Its Option. Under Paragraph 39.4(a) of the AIR CRE Leases, Lessee cannot exercise an Option To Extend the Lease if, at the time of exercise, any Rent is unpaid. Paragraph 39.4(a) provides: “Lessee shall have no right to exercise an Option: . . . (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee).” Accordingly, if Rent during this COVID-19 period is unpaid, Lessee does not automatically lose any Option To Extend. However, if at the time of exercise of the Option, there is any unpaid Rent, Lessee cannot exercise the Option. Note: There are other circumstances during which Lessee cannot exercise an Option (see Paragraph 39.4(a)).
If Lessee Timely Exercises its Option, and Does Not Pay April 2020 Rent Before the Option Period Begins, Lessee’s Option Could Terminate. What happens if Lessee exercised its Option To Extend prior to April 2020, but the option period has not commenced, and Lessee fails to pay April 2020 Rent? Lessee’s Option can still “terminate” in two situations.
First, Lessee’s Option terminates if “Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof)” (see Paragraph 39.4(c)(i)). Accordingly, even where Lessee timely exercised an Option before April 2020, if the Option period has not commenced, Lessor may argue the following: that a failure by Lessee to pay April 2020 Rent by May 1, 2020 (30 days after April 1), causes Lessee’s Option to terminate.
Second, Lessee’s Option can terminate after written notice to pay April 2020 Rent and failure to cure. That is, if Lessee does not timely pay April 2020 Rent, and Lessor gives Lessee written notice of nonpayment and 3 business days to cure under Paragraph 13.1(b), Lessor may argue that a failure to cure within that period terminates the Option under Paragraph 39.4(c)(ii).
Excerpt from AIR CRE Leases
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise an Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee’s due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (ii) if Lessee commits a Breach of this Lease.
Note: Paragraph 39.4 is not included in the Multi-Tenant Month To Month Lease Gross