Tenants Face Questions and Landlords Face Rent Losses During COVID-19 Pandemic

03/26/2020

The COVID-19 pandemic has sent shock waves through the business world. Throughout the country, retailers and restaurants have been forced to close or dramatically limit services. In many cases, these changes have been ordered by state or local governments, which are requiring residents to shelter in place or requiring all non-essential businesses to cease operations. In other cases, businesses are simply closing due to lack of demand, employee issues or financial limitations. This rapidly changing landscape has resulted in many questions among tenants (some of whose businesses are closed) and landlords facing rent losses. This client alert highlights some of the issues and options.

Rent Concessions or Restructures

In many cases, both landlords and tenants will benefit from arrangements that provide temporary rent concessions, deferral, or restructuring. Landlords do not want spaces to remain vacant for any longer than necessary, and allowing existing tenants to reopen – even at reduced or restructured rent – is likely better for business than any alternatives. And of course, tenants want to keep their businesses open and operating, but to remain viable will need some rent relief. The key to obtaining rent concessions or the restructuring of a lease is early, constant, and honest communication between tenants and landlords, as such concessions and restructuring are generally not required under leases.

Force Majeure

Many commercial leases contain a force majeure clause. Such clauses generally excuse performance of certain obligations upon occurrence of enumerated conditions. Importantly, the mere inability to pay rent is likely not considered a force majeure. If the force majeure clause in a lease contemplates a pandemic, government restrictions on business operations, or has broad general language, it may relieve the tenant of the obligation to continuously operate or maintain the property in particular ways. It may also, depending upon the language in the particular lease, permit either the landlord or tenant to terminate if force majeure is applicable for an extended period of time. Landlords and tenants that may wish to exercise rights under a force majeure clause should carefully review that clause and ensure that all notice and other requirements are followed precisely. Courts have previously held that failure to do so can waive the right to rely on the force majeure clause.

Casualty Clauses

A casualty clause generally provides tenants and landlords the option to terminate, or requires a landlord to provide the tenant with rent abatement, in the event that the property is substantially damaged. Although a tenant’s ability to operate its businesses has been disrupted by the pandemic, a casualty clause is often drafted to explicitly cover fire, floods, explosions, or similar occurrences that degrade the physical or structural integrity of the premises. Casualty clauses that are this explicit often do not address circumstances where tenants cannot use leased space that remains physically available (including as a result of a communicable disease).

Insurance Provisions

To the extent insurance is required by the landlord, tenant, or both under a commercial lease, it is important to understand, based on the language of your particular contract, which party’s insurance is triggered by closures or disruptions arising from COVID-19 — the landlord’s insurance, the tenant’s insurance or both policies. Owners or tenants of restaurant spaces may be more likely to have business interruption or contingent businesses interruption coverage based on infectious disease than owners and tenants of other types of retail spaces. But be wary of exclusions from coverage that may be included in any such policy. In the event that you do have applicable insurance coverage, expect delays in collecting funds based upon anticipated increases in time for processing claims.

Monetary Default Provisions

If tenants unilaterally elect not to pay rent based upon a theory arising from any clause in their lease or otherwise, most landlords have the right to deliver a notice of monetary default. This notice will require tenants to cure the default quickly. If tenants fail to cure the default, landlords in many instances will have the right to accelerate all lease payments with possible immediate recourse to guarantors and/or letters of credit. Tenants should be aware of the risks associated with the decision not to pay rent.

Co-Tenancy Provisions

Some leases provide tenants with certain rights, such as rent reduction, if the shopping center exceeds a certain vacancy rate. These provisions are generally known as co-tenancy provisions. The closure of businesses as a result of COVID-19 could lead some tenants to try to exercise their rights under such provisions. The availability of such rights will depend on the lease language.

Continuous Operation Clauses

Many leases require tenants to operate their business continuously, or they permit closures only for limited periods of time. If COVID-19 or associated governmental restrictions necessitate extended closures, many landlords and tenants may find that these provisions have been violated. It is important for both landlords and tenants to plan ahead for this possibility and consider whether to negotiate accommodations.

Landlords and tenants are likely to take different positions about lease terms’ meanings and potential litigation. And every lease is different, so solutions may differ from lease to lease. In considering the appropriate course of action, parties should assess the inevitable delay given that courts are likely not able to redress conflicts in the short term. Working together to keep leases in place and employees employed, even where the government has required local businesses to stop operating, may be the best method to minimize the damage to all parties during this time of crisis. Effective communication between the parties will be a key component to the success of both landlords and tenants.

As landlords and tenants continue to face these and other issues arising out of the COVID-19 pandemic, the experienced landlord/tenant and workout attorneys at Lewis Roca Rothgerber Christie are here to help.

Tenants Face Questions and Landlords Face Rent Losses During COVID-19 Pandemic

Professionals

Practice Areas

Offices

Region