Commercial Leases during the Coronavirus Pandemic

In our last blog, we discussed contracts during the coronavirus pandemic. Today’s blog will get a little more specific to discuss commercial leases.

As more and more “non-essential” businesses (bars, restaurants, gyms, venues, etc.) are being ordered to close in an attempt to mitigate community spread of the Coronavirus, business owners are concerned about overhead—primarily employees and commercial rent. Business disruption is completely certain for these businesses, and many commercial landlords and tenants are calling to ask about their options.

The commercial landlords are concerned about cash flow for purposes of meeting their mortgage/loan requirements and any payroll, whereas the tenants are concerns about meeting rent obligations and payroll obligations. Both have valid concerns, and both need to consider the long term effects of their actions.

Could a landlord technically sue to evict a tenant for nonpayment or failure to continuously operate? After following the statutory pre-requisites, of course. In a more normal market, the landlord would evict the noncompliant tenant and get another one; but this is not viable option for landlords in the current situation. Furthermore, the tenant may have invested money into a build out and other infrastructure which the tenant does not want to lose. In the current climate, it may be in the best interest of both parties to try to come up with creative solutions to avoid litigation and defaults by various parties of various agreements. 

The first, and most important step, is to review the lease agreement. While most commercial leases will not carve out obligations relating specifically to a communicable disease, they will offer guidance on related obligations of the parties which could help the parties reach a resolution.

1. Does the lease have a requirement to continuous operation? If so, are there exceptions?

2. Does the lease contain any provisions regarding rent abatements?

3. Is there a force majeure clause that allows either of the parties to not perform under the agreement? (See our previous blog post about contracts). 

4. Does the lease require any insurances that could cover the loss (like business interruption insurance), and is there a provision indicating whose policy would cover a loss of this sort? If so, what does the policy cover and what are the exceptions?

5. What does the lease define as a “default”, and what are the parties rights in the event of a default?

6. Does the lease address utilities and obligations regarding provision and payment of utilities? If so, are there any ancillary contracts that need to be reviewed?

7. A desperate tenant may also try to make novel arguments under casualty provisions orcondemnation/eminent domain provisions, so any provisions addressing this in the lease should also be reviewed.

The second step is for landlords to review their loan documents to make sure they are aware of their obligations under the loan, and what they can or cannot do when coming up with solutions. There may be certain debt-to-income ratios, occupancy requirements, and other covenants that require a certain amount of rental revenue on a monthly or annual basis. Any deals worked out with tenants will need to comply with these requirements and/or the landlord may need to work out its own deal with the lender. If the strain to keep compliant with the loan requirements becomes great enough, there may be force majeure or other provisions which landlords can rely upon to avoid a judgment or foreclosure. 

Some options may include:

  • Mutual termination of the lease
  • Short term rent abatements, if there is a government closure or curtailment of hours or other operational conditions. 
  • Both landlords and tenants should consider the availability of emergency monies and loans to maintain obligations, and collaborate to find stopgap funding so that leases are maintained.
  • Some tenants may want to negotiate with their landlord for the right to file their own eminent domain action to recover if the government has “taken” the property where they operate their business.

In the end, neither the landlord nor the tenant can expect to operate as usual—there is a new normal that requires unprecedented collaboration to mitigate damages and ensure the best opportunities for quick economic recovery after this pandemic passes. Calling defaults and taking tenants to court may not be in the best interests of all involved.

This is not a scenario that either a landlord or a tenant should navigate without legal counsel. If you find yourself in this predicament, please contact Trembly Law Firm to speak with a knowledgeable attorney who can review the relevant documents with you and help propose potential solutions to the other parties involved. Furthermore, any such workouts/deals \ need to be put into writing with the other party and/or lender to ensure they are enforceable, to specify the duration of the deal, and clarify whether it will revert to the original deal upon the existence of certain conditions. 

Trembly Law