Now that the World Health Organization has declared COVID-19 (a/k/a Coronavirus) a pandemic, governmental agencies have implemented precautionary measures to mitigate the spread of the outbreak, which have significant economic implications for many businesses. What does this mean for your current commercial leases?
Most leases contain force majeure or inability to perform clauses, which provide that certain events outside of a party's control, such as "acts of God," "terrorism," "governmental action," "riots," and similar issues that may excuse a party from satisfying its obligations under a lease.
Typically, the payment of rent is not excused due to a force majeure event in a lease, so even if a "pandemic" or "epidemic" is in the definition of a force majeure clause, tenants are typically still required to pay rent.
ACTION ITEM: It is important to review your leases with respect to such clauses. Determine if a "pandemic" or "epidemic" is included in the definition of force majeure. If not, determine if other provisions of the lease excuse non-monetary obligations and perhaps monetary obligations. To the extent a force majeure provision is applicable, the party invoking the same may be required to send written notice to the other party, so both the force majeure and notice provisions of the lease should be carefully reviewed.
As a general condition, some retail leases require that a tenant remains open for business (fully stocked and staffed) during certain hours and days and/or to remain open and operating. Unlike weather phenomena such as a hurricane or a blizzard, for instance, COVID-19 does not prevent a tenant from operating.
Recently enacted government restrictions, such as curfews, limitations on social gatherings and shuttering of restaurants and bars (except for takeout/delivery of food), may excuse a tenant's performance of certain covenants for the foreseeable future, as leases generally require tenants to comply with the law with respect to their operations. Consider whether a government restriction amounts to a "temporary taking" under the lease condemnation section.
ACTION ITEM: A review of your lease should be conducted to determine the interplay between a tenant's compliance with law obligations and the inability to comply with certain operating covenants. Determine what actions a tenant may be permitted to take (or not take) in this regard and whether the condemnation sections would provide any relief to a tenant.
GOING FORWARD: New leases should contain "pandemic" and "epidemic" as force majeure events so that it is clear the same would excuse, at the very least, non-monetary obligations. There may be litigation to determine if a pandemic and epidemic is considered an "act of God" in the event a force majeure definition does not explicitly include pandemic or epidemic. Consider adding abatement rights and/or termination rights if a tenant is unable to conduct business for a protracted period of time. A review of the condemnation provisions may provide some relief for temporary takings if the government requires either reduced hours of operation or a shutdown of entire properties and businesses.
Rent Reduction or Rent Abatement
Most leases do not have a general rent abatement provision for a tenant's inability to operate. Any such abatements that may be in a lease agreement are typically limited to loss of services that prevent a tenant's operation, provided such loss of services is caused by a landlord's negligence, willful misconduct, or even mere acts or omissions.
ACTION ITEM: A review of your lease should be conducted to confirm tenant abatement rights, if any. Tenants should consider requesting rent relief, and landlords should prepare to respond as we will likely see a rise in tenant bankruptcies.
GOING FORWARD: Consider amendments to leases to increase or reduce obligations in light of COVID-19, such as lowering performance obligation to remain open, in the case of retail leases, and requirements to increase janitorial services under office leases. Also, if a party has any right to terminate its lease based on sales or failure of a party to meet a financial covenant, those provisions should be reviewed and perhaps amended.
It is possible that an epidemic or pandemic could give rise to a claim under insurance policies typically carried by landlords and tenants.
For example, business interruption insurance (which is triggered by a covered interruption or event) provides coverages when a covered risk materially impacts business operations, and it will reimburse the policyholder for lost profits and additional attendant expenses.
ACTION ITEM: It is vital to examine your own individual policies to determine whether or not "disease" is a covered interruption event under said policy. Our Insurance Group is also available to assist in this regard and has provided guidance on potential considerations.
Suspended Eviction Proceedings
Both New York and New Jersey have suspended eviction proceedings and pending orders statewide until further notice as officials work to slow the spread of COVID-19. The suspension applies to both residential and commercial evictions and is designed to allay concerns that businesses most affected by the outbreak will not face imminent eviction.
ACTION ITEM: Keep abreast of information on governmental measures taken by city, state, and federal officials to assist both residential and commercial tenants and landlords, as well as any of their employees, to take advantage of those benefits.
The Real Estate Department at Pryor Cashman stands ready to guide you through these legal issues during these uncertain times. We are available to review your existing leases, PSAs, and other agreements to discuss COVID-19's impact on your real estate agreements and to discuss any questions you may have on what steps to take next to ensure safe passage through this storm.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.