Navigating Your Commercial Lease Obligations During the COVID Pandemic
The Coronavirus has wreaked havoc on businesses across the country. This guide provides answers to the most common questions we’ve received from commercial tenants in the past few weeks. We hope readers can use this document to assist in discussions with their landlord. In these uncertain times, it behooves both landlords and tenants to act reasonably to address the current hardships created by the pandemic, regardless of what the lease may require of either party.
** Will a “Force Majeure” clause excuse me from paying rent?
Your lease may include a force majeure clause. “Force Majeure” means superior force in French, and such a clause excuses or delays a party’s obligations due to the occurrence of events beyond the party’s control. The events giving rise to the delayed or excused obligations are those listed in the clause, and typically include acts of God, fire, accident, weather conditions, riots, wars, labor disputes and strikes.
Whether COVID 19 and the related stay-at-home orders and business shut-downs constitute a force majeure excusing or delaying any of your lease obligations will depend upon the specific language in your lease, applicable law where you are located, and the circumstances of your situation. Often, these clauses are one-sided allowing only the landlord to invoke them, and even where the clause is reciprocal, it may exclude payment of rent from the obligations that may be delayed or excused.
You should review the clause in your lease to see if it applies specifically to epidemics, quarantines, disease or the like. If not, look for more general language such as “emergency or governmental act or order” or “any other event beyond the party’s control,” which may allow you to argue for its applicability.
Courts interpret force majeure provisions narrowly, and often insist that the event giving rise to the delayed or excused obligation falls squarely within one of the events enumerated in the clause. Where a force majeure provision contains one of the general, catch-all phrases, courts may hold that words constituting general language of excuse only apply to the same general kind or class as those specifically mentioned. Further, the event giving rise to delayed or excused performance must have been unforeseeable. For those leases entered into after the coronavirus emerged worldwide, the landlord may argue that the closures, business interruptions and other consequences of the pandemic were foreseeable at the time you entered into the lease, rendering the force majeure clause inapplicable.
In situations where non-performance is not excused by the language in the lease, tenants may want to consider whether the lease includes a liquidated damages provision. Liquidated damages provisions may allow a party to terminate the lease in exchange for payment of a specified dollar amount. In some circumstances, the liquidated damages provision may provide an “out” that is less costly than the cost of performance.
** My business has decreased as other tenants around me close. Do I have any recourse?
Look for a co-tenancy provision in your lease, particularly if you leased space in a shopping center. If your lease contains a co-tenancy provision and an anchor tenant or several other tenants have temporarily closed or permanently shuttered, you may have rights to rent reduction or lease termination rights.
** The landlord closed the building where I’ve leased space. What rights do I have?
Many landlords are taking extraordinary measures to ensure that the common areas in their buildings are safe and sanitized in response to the current health crisis, often shutting the building down completely. If you’ve lost access to your building, there are a couple of provisions to look to in your lease.
Your lease may require the landlord to provide certain “essential services.” Look to see what services the landlord must provide, and what, if any, rent relief is available if those services are interrupted for a period of time. Specifically, review the list to see if “access” is listed. If so, you may seek rent relief based on your inability to access the premises during the quarantine or during any extended shut-down for cleaning measures.
Casualty provisions might apply to a lack of access as well, depending upon the specific language of your lease. However, most casualty provisions apply solely to those situations involving physical damage or destruction to the building. If the building where you’ve leased space is closed due to COVID contamination, your casualty provision might provide relief, if you can successfully assert that “contamination” constitutes physical damage.
** We received PPP funds and our landlord is asking us to use those funds to pay past-due rent.
Using PPP funds for past-due rent may jeopardize the forgiveness of the PPP loan. The guidance provided by the SBA has been changing frequently, so it’s wise to discuss the situation with your accountant. If you negotiated rent deferral with your landlord (meaning you are able to pay past-due rent over a period of time), you lose the benefit of that negotiated concession if you use the PPP funds to pay the past-due amount immediately.
** A note on notice requirements:
If you believe provisions in your lease may delay or excuse certain obligations, be sure to strictly adhere to any notice requirements in the provision you’re relying on. Courts do not look favorably upon parties that do not follow required notice timeframes.
** Are there any other remedies if my business is sued for non-performance?
You could present an argument of impossibility or frustration of performance and ask the court to find the lease unenforceable or to abate rent obligations. Impossibility is a defense that, due to an unforeseen event, makes adhering to the contractual obligations too expensive, difficult or impractical. However, most courts view this doctrine very narrowly, requiring the non-performing party to meet very high standards to show that circumstances were exceedingly difficult or expensive.
We believe open, honest discussions between you and your landlord are imperative during these unprecedented times. Often the parties can work together to resolve issues in a manner that is workable for both parties. Please call Richards Dukes Law LLC if we can help evaluate your lease and your options. We offer a free initial consultation, reduced hourly rates and fixed fee arrangements for COVID related matters.