The Coronavirus pandemic is sweeping across the United States and, despite recent signs it may be abating in certain communities, most of the country is under some form of shelter-in-place order that in all likelihood will not be lifted for at least several weeks. The swift and persistent spread of the virus in California is causing commercial real estate landlords and tenants to make difficult decisions to adapt to these sudden changes in the environment.
What do you do when state and local governments have ordered virtually all people to stay home and you can’t use your office or store as a result? Many tenants are speaking with their landlords about relief under their leases and the law. Many tenants and landlords are speaking with their insurance companies to discuss coverage. Many tenants are considering withholding rent payments while they’re unable to occupy their commercial space to run their businesses. Evictions are suspended for at least the next 90 days. What do you do?
The following issues, while not exhaustive, are some important ideas for landlords and tenants to keep in mind and discuss when appropriate. Now more than ever clear and consistent communication is essential for landlords and tenants to navigate these uncertain times.
Read Your Lease. The lease between landlord and tenant remains the primary guide for dealing with the present public health crisis. Review the terms and conditions carefully to understand your rights and obligations under the lease. If there are related agreements – like security, guarantees or loan documents – review those as well to understand what a cessation in rent for several months may mean. Landlords and tenants should continue communicating with one another to maintain their relationships. Before demands or concessions are made, however, talk with counsel about your obligations under each contract and your rights under the law.
Read Your Loan Documents. Some commercial real estate loan agreements contain provisions that may limit a landlord’s ability to amend a lease without lender consent. Make sure you know the requirements of these agreements before you agree to amend or modify a lease, even if only for a short period of time.
Pre-Accommodation Negotiations are Non-Binding. If you’re a landlord, make sure that all discussions you or your agents have with your tenants about potential accommodations under a lease are not binding until all the terms are agreed upon and reduced to a writing signed by both parties. If you have a telephone call with a tenant simply explain this limitation during the call and follow-up with an e-mail confirming that the ideas discussed are conceptual and not binding on either party until reduced to writing. This will minimize the risk that your well-intentioned desire to work through the issues during this difficult time will not result in unanticipated legal consequences.
Force Majeure and Abatement Clauses. From the landlord’s perspective, force majeure clauses may apply to forced closure due to government requirements beyond the control of the landlord. If a tenant explains it will not pay the rent due to force majeure, the landlord should carefully review the lease to determine the tenant’s contract rights under this provision and your obligations. Be careful to comply with all the procedural steps required by the lease for a potential force majeure event. Some leases do not allow a force majeure event to excuse monetary obligations like rent. Other leases permit the tenant to abate rent and/or terminate the lease if it’s unable to access the leased premises under certain circumstances. Each lease is different and its specific provisions must be carefully reviewed.
If you’re a landlord, you should refrain from directly prohibiting tenants from operating from their leased premises unless ordered by the government to do so. A tenant will have a stronger case for non-payment of rent if the landlord prohibits or interferes with the tenant from operating in the space. In the face of county-wide or state-wide government order requiring all persons to work from home, it may not make any difference.
What About Impossibility of Performance? Mandated government closures may require landlords to shut their facilities thereby preventing tenants from accessing their premises. Leases often include rights for the tenant to access their premises on a 24/7 basis and such orders may make it impossible for the landlord to satisfy these obligations. In cases where the lease does not include a force majeure clause, the concept of impossibility of performance may further provide some protection to landlords. The laws on impossibility of performance vary by state but may also offer protection for tenants and should be invoked carefully.
Be Creative and Share the Burden. Some commercial leases clearly exclude payment obligations of the tenant from the definition of force majeure. While some tenants may have announced closures and plans to withhold rent, some tenants and their landlords are seeking creative ways to provide short term relief to tenants and share the burden rather than place it entirely one party. These can include:
- Rent Holiday. Deferred payment of rent for a short period. A tenant could repay the deferred amount by spreading out smaller payments during the remainder of the lease term. The lease term could be extended for the same length as the rent holiday and the tenant could repay the deferred amount at the end of the extended lease term.
- Rent Reduction. Payment of reduced rent for a short period. The reduced rental amount could also be repaid by the tenant in the same manner as described for a rent holiday.
- CAM Only Payments. Payment of only the tenant’s share of common expenses, taxes and insurance for a short period with no payment of base rent.
- Security Deposit Application. Application of the tenant’s security deposit toward upcoming rent payments without a requirement to replenish the security deposit until the crisis abates.
- Guaranties. Deferred payment of rent in exchange for a guaranty of payment in the future.
Review Your Insurance Policies. Both landlords and tenants should consult their insurance advisors and review the specific terms of their policies. Much has been written about the applicability or inapplicability of business interruption insurance and rent loss insurance to pandemic outbreaks. It’s too expansive to discuss here, but few insurance companies will jump at the opportunity to offer you coverage. You must submit a claim, and the sooner the better. Some states are considering legislation to expressly prohibit insurers from denying claims relating to the pandemic. Such legislation would likely be subject to extensive litigation that could delay implementation.
Agree to Toll Critical Dates. In response to the public health emergency, many local governments are providing only essential services. Permitting and entitlement processes in many communities have some to a standstill. Closures have made it difficult to obtain searches of government records for due diligence purposes. While force majeure provisions may well apply, landlords should be sure to comply with lease provisions requiring notice to tenants of such circumstances. Critical lease deadlines may include due diligence periods, permitting and entitlement periods, build-out and completion deadlines, and delivery of possession dates.
Include Updated Force Majeure Provisions in Current Lease Negotiations. If you’re currently negotiating new leases, make sure to discuss whether a pandemic event like the current Coronavirus, or other events that could result in a government shut down or evacuation order (i.e., earthquakes, wild fires, etc.) are included in the definition of a force majeure event. Furthermore, you should clarify the rights and responsibilities of the landlord and tenant when such an event occurs. As this pandemic crises continues, tenants will likely seek relief in the future for similar circumstances and landlords will need to develop responses to these requests, in conjunction with their lenders.
Be Consistent. Landlords, particularly those with multiple locations and many tenants, should try to be as consistent as possible when communicating with tenants and attempting to address tenant concerns under the unique circumstances created by the Coronavirus public health emergency.