Commercial landlords and tenants find themselves in a dynamic and ever-changing landscape as a result of the COVID-19 pandemic and the subsequent protective measures being taken. Entire industries have been shuttered pursuant to emergency orders. The current situation continues to impact both landlords and tenants under commercial leases and both must be proactive in assessing their lease rights and obligations. If multiple tenants at a property are required to cease operations, there will be obvious financial issues for both the tenants and their landlord. Below are several issues and practical considerations that all sides should be aware of and consider.
- Communicate: More important than any legal theory or argument, is the vital need to communicate – with your lender, your landlord or your tenant.
- Force Majeure: Does your lease contain a force majeure clause and if so, are any duties/obligations excused?
- Impracticability: Has COVID-19 and government shut-downs impacted your business such that you cannot perform under the lease or you can only perform with extreme and unreasonable difficulty, expense, or risk of injury?
- Insurance: What is the extent of any business interruption insurance that may be in place?
Communicate: While this notice raises numerous legal issues to consider, one of the most critical issues is a non-legal issue – landlords and tenants must communicate. It cannot be overstated how important it is for both sides to TALK with each other. Proactive and transparent communication and, if possible, coordinated efforts, can help offset the potential impact from the COVID-19 pandemic.
Force Majeure: Most commercial leases contain a force majeure clause which is intended to excuse performance by a party upon the occurrence of events or causes that are generally outside the party’s reasonable control. Examples of such events include fires, earthquakes, or even wars. Rights or obligations that may be excused can include the timely completion of improvements or construction, delivery of possession, or continually operating. Both landlords and tenants are encouraged to read their leases to determine whether they contain a force majeure clause and actually read the clause. Force majeure clauses can be either generalized (i.e., “any Act of God or other circumstance beyond the control of the parties” or specific (setting forth a series of events that excuse performance). It is not uncommon for force majeure clauses to expressly exclude payment obligations including rent, operating expenses and loan payments. Most clauses have detailed notice provisions that require the party seeking relief to notify the other party of their inability to perform. Because of this, landlords and tenants should review any force majeure provision of their leases very carefully to determine whether current events are covered and if so, what liabilities or obligations are excused.
Impracticability: Even if your commercial lease does not contain a force majeure provision, common law may still provide relief to the parties. “Impracticability” means that the duties/obligations under the Lease, could not be performed, or could only be performed with extreme and unreasonable difficulty, expense, or risk of injury as the result of an unforeseen event; in this case the COVID-19 pandemic and the ensuing emergency orders. The mere fact that performance becomes more difficult or expensive than originally anticipated does not justify a finding that performance was impracticable. However, the shuttering of entire industries as a result of government-mandated closures, may be sufficient to make continued performance impracticable. As with the other issues outlined in this notice, communication and mitigation are critical.
Insurance: Most commercial tenants and landlords maintain business interruption insurance to insure against disruptions in their business activities. But business interruption coverage is generally “property” coverage and only protects against interruptions in business activities resulting from physical damage to property. If a tenant is required to cease business operations as a result of the COVID-19 pandemic or as a result of the premises being infected, or the possibility of becoming infected, does that constitute “property damage” such that it would be covered by the business interruption policy? Does the landlord’s policy include rent loss insurance and if so, what are the limits/conditions of that insurance? Just as landlords and tenants need to review their leases to determine their rights and obligations, they also need to review their insurance policies to understand the extent of insurance protection, if any, available.
This client alert is intended for informational purposes only and is a non-exhaustive overview of general considerations for both landlords and tenants. It should not be relied upon as legal advice. Please consult with an SMDK attorney to provide you with advice specific to your situation.