We have received many questions and concerns related to commercial leases in light of the COVID-19 pandemic. Like nearly every aspect of our day-to-day society, commercial tenants and landlords have been directly affected and have already been forced to make difficult decisions. As in any situation related to commercial leasing, the most important resource is the commercial lease itself. If you’re a commercial landlord or tenant, the best place to start in your search for answers on responding appropriately to the current situation is the lease itself. What follows here is a brief list of general considerations for commercial landlords and tenants to think about when making COVID-19 related decisions. Please note, however, that every commercial lease is different, so if you have particular questions or concerns, we recommend you seek legal advice tailored to your particular situation.
Please note, we work with many businesses. Some of them are landlords, and some of them are tenants. As a result, we are well-versed in both sides of the issues. Whether you are a landlord or a tenant, you are seeking a path through the current storm that does not ruin you financially and that does not force you into lengthy and expensive litigation. This is one topic that if relevant to you, please get early legal counseling to make sure you do not inadvertently shut down potentially helpful options.
Most commercial leases contain a provision referred to as a force majeure provision. This provision excuses delays in performance of lease obligations where one party to the lease is prevented or delayed from performing their contractual obligations due to events outside their reasonable control. Force majeure provisions generally do not specifically reference a disease outbreak as a force majeure event, therefore it is important to carefully read your lease to determine if the force majeure provision applies to your current situation. Many force majeure provisions (but not all) include a catch-all category for unexpected events causing delays, which delays caused by COVID-19 responses may fall under. Additionally, most force majeure provisions do specifically classify unavoidable government action as a force majeure event, meaning that a government-mandated quarantine or restriction on specific businesses would likely qualify as a force majeure event.
If a force majeure event causes a landlord or tenant to be unable to meet its non-rent obligations under a lease, it may be excused from fulfilling those obligations until the force majeure event is over. However, nearly all commercial lease force majeure provisions do not excuse or delay the payment of rent. In most circumstances, a commercial tenant remains liable for rent even during a force majeure event.
As an example of an excusable obligation under a force majeure event, a tenant may be excused from complying with a provision in the lease which requires the tenant to maintain continuous business operations at the leased space if the government has ordered tenant’s business to shut down.
Additional defenses to performance may exist for both landlords and tenants, including the concepts of impracticability of performance and/or frustration of purpose. Look for more on these topics in the next email.
Both tenants and landlords should carefully review their business interruption insurance coverage to determine if they are covered under the current situation. Relevant policies must be analyzed on a case by case basis to determine if coverage is available. This coverage, if available, may provide some relief for inability to make rent payments.
If a landlord operates a multi-unit property and maintains control over common areas in such a property, landlords should carefully consider to what extent the landlord will restrict the use and/or access to such common areas as a precaution against the further spread of COVID-19. As always, the landlord should consider the terms of the lease, but also what steps can be reasonably taken to limit potential exposure and spread. Such reduction or restriction of access to common areas (or leased property), could potentially result in an abatement of rent and/or operating expenses owed by tenant, again depending on the terms of the lease.
Tenants should be aware that if they desire to make a significant alteration to the rented premises of some kind in response to this situation (such as significant alteration to allow easier service to drive-thru or to-go customers at restaurants), the tenant may still be required need to gain landlord’s approval. Again, this depends on the terms of the lease and the scope of such alteration.
What is happening now is largely unprecedented. It will likely take many years to work through all the economic and legal ramifications of our current situation. Effective communication and collaboration between landlords and tenants is of paramount importance, now more than ever. However, there also exists the opportunity of tenants or landlords being taken advantage of if they are not aware of their rights. In our view, the best outcomes will be mutually-agreeable, negotiated solutions.
We currently have attorneys working on behalf of landlords and tenants, and as well, working on matters being negotiated and those headed for litigation. Wherever you are at the moment, we will be pleased to provide the best guidance we can. Please reach out to either Monica Pertea MPertea@awdlaw.com or John Carlson JCarlson@awdlaw.com. Our number is (928) 774-1478.