The rapid spread of COVID-19 has created upheaval at almost every level of society. With government-mandated shutdowns of non-essential businesses, rising unemployment, social distancing, and news each day that the spread of the virus has not yet reached its peak, this is a situation that is creating unprecedented difficulties for everyone.
Landlords and tenants of commercial space (whether office, retail, warehouse, or otherwise) are facing their own set of challenges. Many tenant businesses are operating at greatly reduced levels, and many others are not operating at all, whether due to governmental restrictions, market conditions, or some combination of these and other factors. Even where rent payments were timely made through the month of March, many tenants will find it difficult or impossible to continue paying rent in April and subsequent months, and will be looking to their landlords to provide relief in the form of rent concessions or early lease terminations.
Many landlords, too, are facing the prospect of being unable to meet their own lease obligations, such as providing custodial, maintenance, and security services, as they (and their property managers and other contractors) are dealing with the same types of staffing reductions, supply shortages, and social distancing guidelines that are affecting everyone else.
It’s safe to say that this is not a scenario that most commercial landlords and tenants contemplated when they signed their leases. What are the parties to do?
Consult the Lease
The COVID-19 situation may be unprecedented, but in one way it is not unlike any other adverse circumstance that may arise during the term of a commercial lease (or any other type of contract, for that matter): the best first thing to do is to conduct a careful review of the lease, including all amendments, to see if there is any provision that may help – or, as the case may be, impose any additional or special duties upon – the parties in dealing with the situation.
Many leases contain a “force majeure” provision that excuses a party from performing any obligation for the duration of any unforeseen major event or circumstance, outside of the party’s control, which prevents or delays such performance. Typically, such provision will include an illustrative list of circumstances considered force majeure events, which may include earthquakes, floods, “Acts of God”, war, terrorist attacks, strikes, riots, famines, epidemics, and government action. But be aware of two things: (a) Many force majeure clauses in commercial leases specifically state that they are do not apply to the tenant’s obligation to make full and timely payments of rent; and (b) force majeure provisions are typically construed and enforced by courts based on their precise wording, and litigants seeking to go beyond the plain language and to read broader rights and protections into such provisions rarely prevail.
The exercise of force majeure rights, as well as other rights that may exist under the lease, typically requires the exercising party to provide notice to the other party. Landlords and tenants need to take care to ensure that they don’t inadvertently lose important rights and protections by providing (or accepting, as the case may be) notice after the time window for same has expired, or notice that is otherwise defective under the terms of the lease.
In some commercial leases, the parties have negotiated provisions into the lease that give the tenant or the landlord or both the right to initiate an early termination of the lease, usually with some formula for a final termination payment to be made. Parties who have such provisions in their leases will want to consider whether the current situation falls within the scope of the early termination right or not, and if so, whether moving for termination is their best strategy to pursue at this time. But the same warnings stated above will apply in this context as well: any attempt to exercise any such termination provision should be grounded in the plain language of the lease, rather than a hoped-for creative and expansive interpretation of such language; and the party seeking to exercise (or oppose, as the case may be) such termination option against the other party’s wishes needs to be careful that all procedural requirements, relating to notices or otherwise, for exercise of such option under the lease are followed to the letter.
Possible External Sources of Relief
Tenants and landlords facing the prospect of either party being unable to perform their lease obligations due to the COVID-19 pandemic should also carefully review their insurance policies, in the event that any losses that they might experience in this situation might be covered in whole or in part by such policies. Having said that (and now sounding a familiar theme), insurance policies are another prominent example of legal documents that are typically construed and enforced narrowly, based only on their precise wording. More guidance on understanding your insurance coverage related to COVID-19 can be found here.
Other possible external sources of relief may be available to tenants or landlords (or both) who qualify as small businesses, through federal and state government relief programs offered in response to the COVID-19 situation. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that was signed into law on March 27, 2020 introduced, among other things, the Paycheck Protection Program (“PPP”), under which businesses, including sole proprietorships and non-profit entities, that are eligible (in most cases defined as having fewer than 500 employees) can apply to receive a loan to cover payroll costs and other essential costs of the business. To the extent that the loan proceeds are used to pay for the types of costs specified in the CARES Act (specifically including rent obligations, for businesses that are tenants under a lease agreement in force before February 15, 2020) during the period ending June 30, 2020, the business will be eligible for loan forgiveness. Tenants who receive PPP loan funding can coordinate with their landlords to ensure that a portion of the loan proceeds are applied to rent obligations during the covered period. More information on PPP loans can be found here and here.
The U.S. Small Business Association (SBA) offers additional types of COVID-related relief, including the low-interest Economic Injury Disaster Loan (“EIDL”) program, more information on which can be found here. The State of Maryland is also offering small business relief programs related to the COVID-19 crisis, more information on which can be found here.
Negotiation, Flexibility, and Planning for a Post-COVID Future
One of the advantages of commercial leasing is the flexibility and freedom that the parties have to respond to changes in circumstances by entering written amendments that change, sometimes radically, the lease terms that existed previously. In an ordinary (pre-COVID) world, a landlord, faced with a tenant unable to pay its rent, might have elected, among other available alternatives, to default the tenant, terminate the lease, and sue the tenant for eviction and money damages. But during the current pandemic, there are many reasons for landlords not to take such an approach, including:
- Greater numbers of tenants in a given rental property who are unable to operate their businesses, pay their rent, or both;
- Reduced prospects of finding replacement tenants for vacated spaces;
- The possibility that the landlord may also be unable to perform 100% of its obligations under the lease with regard to maintaining cleanliness, safety and security at the rental property;
- Laws and orders being enacted/issued in multiple jurisdictions to protect commercial tenants, (like the measures already protecting residential tenants) from eviction, lockouts, or service cutoffs while the pandemic conditions last, and for a period of time to follow; and
- The humanitarian impulse for all members of society to work together to get everyone through this crisis, and hopefully to return to normal, healthy operating conditions thereafter.
For all of the foregoing reasons, the best course of action for many commercial landlords and tenants to pursue during these difficult times is going to be to keep communication channels open, to discuss present and anticipated circumstances and needs, and to see if the parties can work out a creative modification of the existing lease that allows them both to weather the current storm and find calmer waters on the other side.
The parties may be able to explore, for example, rent deferral arrangements whereby rents will be reduced (or, if the landlord can afford it, abated altogether) now, for a period of several months, but following that period, when government restrictions are lifted and businesses are able to be open again, the rents will be paid at an amount higher than originally scheduled over a stated period, up to and including the remaining months of the term (including any extension of the term that may be agreed to as part of the amendment), to allow the landlord to receive the same amount of total rent over the full term of the lease that was contemplated before the COVID pandemic hit.
In some cases, the parties may determine that a rent deferral arrangement as described above, or any other creative, collaborative lease modification, is not a workable solution, and that the COVID situation has destroyed the possibility that the tenancy can continue. Even in such dire circumstances, the parties may find negotiating a lease termination agreement on mutually acceptable terms to be the best way to proceed, compared to the costs and uncertainties of litigation.
Of course, any agreement modifying the terms of the original lease is an important legal document that needs to be well and carefully drafted, to make sure the parties are getting the arrangement that they intended and are not inadvertently setting themselves up for future costly problems and disputes.
If you are a landlord or tenant of commercial space, looking to identify your best options and pursue your best strategies under your lease in the face of the COVID-19 pandemic, please feel free to contact me either at email@example.com or at (410) 659-1333.
Visit our COVID-19 Resource Page for more updates.