The coronavirus pandemic has become an encompassing aspect of everyday life, impacting everything from where we work to when we go shopping. We have heard from many commercial landlords about how to address issues that are arising related to the operation of their business and the impact on their leases. Herein, we generally address some of the questions we have already seen, from tenants withholding rent to the impact of force majeure. We emphasize that this is directed at commercial (non-residential) landlords.
Your Lease Remains Intact
The answer to almost all the questions we are receiving is: it depends on what your lease says. While issues surrounding force majeure and related legal arguments are addressed below, the most likely result is your lease remains a legal and binding contract. That is true for the obligations of your tenants, and it is true for the landlord’s obligations as well. But there is a good chance that most lawyers who receive questions arising from the unusual circumstances presented by COVID-19 are going to first ask to see your lease. That needs to be the starting point of any analysis.
For example, we have received questions about whether a landlord can obligate a tenant to do a deep clean of its premises if one of the tenant’s employees has reported contracting the virus. Our starting point in addressing the issue was that the lease likely has language requiring the tenant to maintain its premises in good order and repair. That remains enforceable. What else might be relevant in the lease? Does your lease contain language requiring tenants to take appropriate steps to ensure their business does not interfere with the landlord’s operation of the space or other tenants’ business? That would be another basis to insist on a tenant undertaking that responsibility.
Similarly, your leases likely impose upon the landlord obligations to maintain the common areas in good repair and in a way so as to ensure all tenants may enjoy the use and benefit of those areas. That may require extra maintenance on your part in the coming weeks. But it is your obligation under the lease.
In all circumstances, the first answer is tied to what your lease says.
Withholding of Rent
We anticipate many tenants will not make timely rent payments starting in April. There are two questions regarding timely payment of rent in the current crises. First, is it legally justified? Second, will you choose to provide tenants with some leeway?
The first question is in many ways easier. It depends on the lease. Local law may make some exceptions for excusing the payment of rent under certain, particular circumstances, but for the most part rent is due when stated in the lease. Accordingly, the primary justification for a tenant to not pay rent would be if there was, for some inexplicable reason, language in the lease that permits the rent to be withheld. Absent that, rent is legally owed when called for in the lease.
The second issue is a business decision. One term we have heard is “compassionate collection.” The one piece of advice we will generally give in terms of choosing to not strictly enforce any tenant’s rent obligation is to make sure, at the appropriate time, you affirmatively reinstate your intent to strictly enforce all lease terms. Contract law generally recognizes that the conduct of parties may constitute a waiver of certain portions of a contract. If you allow a tenant to remain in possession without paying rent, that may be interpreted as a waiver of some portion of the tenant’s obligation to pay rent. The law continues, however, that a party who has waived a contractual obligation by conduct may later insist upon strict performance of the contract on a going forward basis. In other words, we recognize a potential waiver, but going forward we insist on strict performance. Whether it’s rent, hours of operation, or any other obligation, if a landlord chooses to overlook that obligation during the current crisis, it should be prepared to formally reinstate the obligations when the crisis passes.
If you choose to formally enter into some lease alteration with a tenant regarding rent, we strongly recommend you enter into a formal lease amendment or letter agreement that indicates (i) what changes are being agreed to and (ii) for how long. The amendment/letter agreement should be executed by both parties and should also contain language that indicates the strict performance of the initial lease will be reinstated on a specific date. Additionally, it is important for landlords to take their loan obligations into account when responding to these issues. Loan documents often contain covenants that limit the landlord’s authority to amend the lease or waive enforcement thereof absent lender consent.
Even if you choose to strictly enforce your lease, a landlord should be aware that its opportunity to pursue eviction as a remedy may be seriously curtailed for a period of weeks, at a minimum. Many states, including Georgia and North Carolina, are currently operating under a judicial emergency. While the impact may differ from state to state, the impact on a landlord is that you are unlikely to get a hearing for at least a period of weeks, and you probably cannot get a writ of possession without a hearing. Moreover, reporting shows that several localities have publicly stated that they will not evict anyone during the current crises, even if a writ of possession is issued by a court. These latter concerns are primarily driven by the impact on residential evictions, but the impact will be felt in the commercial area as well.
“Force majeure is an event that can be neither anticipated nor controlled,” according to Black’s Law Dictionary. The enforcement of force majeure provisions, however, is neither that simple nor that straightforward. The ways in which a force majeure provision in a commercial real estate lease may be negotiated and drafted are limited only by the imagination of the people negotiating the contract.
Accordingly, the very first question to ask if a question of force majeure comes up is: what does your lease say? It may contain a force majeure provision, or it may not. It may define very specifically what events are covered under the provision, or it may rely on catchall phrases such as “Act of God.” But the starting point of any force majeure analysis is what is in the lease.
Only if the lease is not specific enough to include or exclude a pandemic will the general question of whether COVID-19 is an act of force majeure arise. Standing alone, the answer will almost certainly be yes. But arguments can be made, for example, that the real impact is not the virus itself but governments’ reaction. Does that change the analysis? Maybe. The point is that if your lease does not specifically enumerate these current issues as acts of force majeure, there could be room for debate.
The next issue is: what are the ramifications of a force majeure provision? Can the lease be terminated? Momentarily suspended? Again, the answer is whatever is in the lease. And if the lease is silent, it is difficult to predict. The law on force majeure is broad, but there does not seem to be a general answer to the question of what relief a force majeure provision provides if it is not defined in the lease.
We note that it is not uncommon for lease provisions to exclude the payment of rent from the scope of relief permitted under the force majeure provision. If that is true, rent should remain due regardless of the claimed act of force majeure.
Impracticability (or Frustration of Purpose)
Many tenants are seeking arguments to either abate rent or terminate leases in the face of economic pressures. The most common arguments we have heard relate to the presence of force majeure provisions or the impracticability/frustration of undertaking continued operations by a tenant. In the face of these arguments, the presence of a force majeure provision in the lease should work to the benefit of the landlord.
The legal treatise called the Restatement (Second) of Contracts recognizes that an order of the government may make performance of a contract impracticable. The Restatement also generally recognizes the concept of frustration of purpose. Whether the current environment qualifies to make commercial leases unenforceable, temporarily or for the length of the lease, will undoubtedly be litigated somewhere. Questions surround not only whether the current environment qualifies to provide relief but also what is the scope of relief? If a governmental order that results in shutting down a business is temporary, is the party seeking a reprieve limited to temporary relief? Again, this will likely be a matter for the courts in the relatively near future.
But the presence of a force majeure provision in the contract works in favor of a landlord in this instance. Without delving into the legal niceties, in Commonwealth Edison Co. v. Allied-General Nuclear Services, the well-respected jurist Judge Richard Posner held that the presence of a force majeure clause in the contract eliminates the defense of impracticability. There is some contrary case law, but Judge Posner’s logic seems to be the better argument and prevailing view.
If faced with a tenant who raises issues of impracticability (or frustration of purpose), the first thing a landlord should do is, again, check the lease. Is there a force majeure provision? What does it say? That is going to be your guide in addressing these issues.
A landlord wishing to reduce the number of hours to keep a building or shopping center open, or faced with issues of tenants reducing their operating hours, must undertake two considerations. First, what are the legal obligations? Second, regardless of individual rights, should I be willing to make adjustments or overlook violations? This analysis presumes there has been no exercise of governmental police power to require the closure of buildings and does not address the parties’ rights in that instance.
The first question is what are the contractual obligations in the lease. Does the lease require a tenant operate for a minimum number of hours for a minimum number of days? If so, and barring some other language (in a force majeure provision, for example), that should be enforceable. Similarly, if the lease requires a landlord to keep a building open and/or operational during certain times, that should be enforceable.
The second question is likely to be the bigger issue in the weeks ahead. Does the landlord wish to enforce the provision at this time? The issues are similar to what was discussed above about rent, including the importance of notifying tenants of the landlord’s intent to insist on strict performance after the crisis has passed.
Governmental Entity Shutting Down Building
We have seen over the past week a growing number of cities and other governments essentially shutting down businesses, either by requiring certain public businesses cease operations or, in even more dramatic fashion, requiring all citizens to stay home except for urgent and necessary reasons. How does this impact a building owner’s rights? How does it impact a lease?
The first of these questions is in many ways the biggest issue that owners of business and retail space will face. What are your rights if the government essentially makes you shut your building(s)? Unfortunately, the short answer is “not much.” The law has always made a distinction between a government taking a piece of property and regulating it out of existence. The former is compensable; the later may be considered a proper exercise of the government’s police power.
It seems almost certain that governments’ response to COVID-19 is a proper, if extreme, exercise of its police powers. Whether it’s the State of California or the City of Atlanta, the government has the legal authority to impose restrictions on the use of property when done for the public good, especially when those restrictions are temporary.
As to your leases with tenants, everything that is discussed above applies to restrictions the government requires you to impose. Are you required to close your office tower? Check your leases for force majeure clauses. Have to reduce hours? Consider the impacts of impracticability and frustration of purpose.
Notice to Other Tenants of COVID-19 Infections
Does a landlord have an obligation to inform all of its tenants if one reports an infected employee? This is a tough one. It is likely not covered by the lease. In fact it may not be covered by the law. But the first step is to notify your local health department if the tenant has not already. After that, our recommendation is to inform all tenants if one tenant has reported the presence of coronavirus to the landlord. Any and all private information, including the name of the infected individual and the company where she worked, should remain private. But putting others on notice so they make take appropriate steps to protect themselves seems prudent.
For more information, please contact us or your regular Parker Poe contact. You can also find the firm's additional alerts related to the coronavirus pandemic here.