COVID-19 and Commercial Leasing Issues
The coronavirus is rapidly spreading and so are its impacts on commercial properties. Landlords and tenants face challenging questions about their respective obligations in this rapidly changing environment and how to communicate productively with each other while preserving their legal rights.
Review Your Lease. First and foremost, the evolving crisis does not automatically relieve either party from their obligations under the lease. The lease should be carefully reviewed to determine which provisions might, and which provisions might not, apply.
What is Force Majeure? “Force Majeure”, which means “superior force”, may relieve tenants and landlords of certain obligations or deadlines. Force Majeure provisions basically provide that certain lease obligations may be excused, limited or delayed, due to the occurrence of certain unforeseen extraordinary or catastrophic events.
When Is Force Majeure Available? The express language of a Force Majeure clause in a lease will determine which obligations are relieved, limited or extended. Courts have tended to strictly construe Force Majeure clauses and are often reluctant to grant relief unless the clause is very clear and specific. Just because the situation is dire does not mean that a Force Majeure claim will be an option for either party.
What about Rent Payments? Force Majeure clauses typically expressly exclude payment of rent as the result of a Force Majeure event. Does this mean that if it is not expressly excluded, that a serious economic setback leading to inability to pay could be found to be a Force Majeure event? Courts construing business contracts tend to view such claims with skepticism. In the current environment a court may be more open to such positions but would likely consider the nature of the use, the ability of the tenant to carry on some level of business and the length of the Force Majeure event.
Linkage and Causation. There must be a link between the supervening event and the failure to perform. For example, if governmental restrictions are a Force Majeure event, a case can be made that a governmental order to close a retail operation would directly excuse an operating covenant, or, possibly, especially if closure is ordered by the landlord, the obligation to pay rent. Similarly, an order to “shelter in place” may virtually eliminate customer traffic, but the order is directed at individuals, and the effect on shopping decisions is indirect. Even less direct in terms of linkage is government “advice” to stay home, avoid crowds, etc. What happens if a landlord or tenant decides to close or prevent access to the leased premises as a sensible preventive measure? Like excusing rent payments, decisions will likely be made on a case by case basis and will be tied to the actual use, the actual impact of the order or health condition and how long the occurrence lasts.
What Can I Do Now? More than ever, landlords and tenant should keep their lines of communication open. There may be things that landlords can do to assist tenants with their immediate needs, such as establishing delivery and pick up areas. The parties should also closely review their leases. The language of the leases will govern the individual situations. The parties should also keep an eye on relief programs that are being developed by all levels of government. Ultimately, the parties should be prepared to work together and possibly amend their leases to facilitate getting through this crisis. In the end, working together now could have the effect of strengthening and lengthening the relationship later.
We recognize that this is a simplification of complicated legal issues that differ in each situation. As always, your Honigman Real Estate practice group stands ready to review applicable leases and to work with you to devise the proper strategy.