Real Issues Facing Retail Landlords in Light of COVID-19
- Retail landlords are not immune from the tremendous impact on commercial businesses due to COVID-19, ranging from government directives to implement social distancing, travel bans and sheltering at home to the mandatory closures in some states of restaurants, retail, entertainment and other "non-essential" businesses.
- In this time of extreme changes in societal behavior, it is important for both commercial landlords and tenants to understand their legal rights and remedies under their leases, paying particular attention to any force majeure clauses.
The rapid spread of the new coronavirus (COVID-19) has had a tremendous impact on commercial businesses as a result of recent directives to implement social distancing, travel bans and self-quarantining, followed by, in some states, government directives for mandatory closures of restaurants, retail, entertainment and other "non-essential" businesses.
As neither retail landlords nor tenants are immune from the effect of these directives and changes in societal behavior, it is important for both commercial landlords and tenants to understand their legal rights and remedies under their leases, paying particular attention to any force majeure clauses.
Force Majeure Clauses in Leases
A "force majeure" clause is standard in most commercial leases and provides for the postponement or suspension of one or both parties' performance obligations when circumstances arise that are beyond the parties' control and make performance of the contract impractical or impossible. The types of events that constitute a force majeure depend on the specific language included in the clause itself. Generally, force majeure clauses contain a list of specific events that constitute force majeure. The more specifically enumerated events that are included in the clause, the more likely a court will interpret only those specifically enumerated events to constitute force majeure.
For instance, if the clause specifically identified epidemics and/or pandemics as events of force majeure, then a court would have stronger textual support to find that the outbreak of COVID-19 – which the World Health Organization, the federal government and many state governments have declared a public health emergency – constitutes a force majeure event.
Interpretation of broader clauses that contain language such as "acts of God" or "anything outside the parties' control" or catch-all language such as, "for other reason whether of a like event" will likely turn on the laws of the state selected in the governing law provision. Non-performance due to financial or economic hardship is not enough to fall within a force majeure clause, absent an express provision in the definition of force majeure. A party relying on a force majeure clause to excuse performance has the burden of proof that the event was beyond its control and without its fault or negligence.1
What Is the Effect of Force Majeure on the Duty to Pay Rent?
A tenant's rent obligation will be governed by the terms of the lease. Force majeure clauses in the commercial lease context may require rent payments, even in light of events outside the tenant's control. Many commercial leases provide that the tenant's obligation to pay rent is independent from any of the landlord's obligations under the lease. Notably, some courts have held that financial hardship is not grounds for avoiding performance under a contract.
What Is the Landlord's Remedy if the Tenant Does Not Pay Rent?
Landlords should familiarize themselves with any monetary default provision in the lease in the event that a tenant elects to not pay rent based on force majeure or any other lease provision. Most leases provide the landlord with the right to terminate the lease or terminate the tenant's right to possess the premises in the event of a monetary default. The lease may also include language requiring the landlord to deliver notice of monetary default and demand that tenants timely cure the default, with the penalty for failure to do so being the right to accelerate all lease payments.
However, landlords should be mindful that in these unprecedented times, some cities, including Los Angeles and San Francisco, are proceeding to impose moratoriums on new commercial eviction proceedings. It should also be anticipated that laws will continue to change during this pandemic and that other states and municipalities may likely implement similar moratoriums.
Thus, for a variety of reasons, landlords may seek to work with their tenants who are requesting a rent abatement by negotiating a rent payback period or extension of lease terms so that the parties can get through this challenging time. However, any new payment terms must be drafted properly in a formal lease amendment and should take into consideration a possible future bankruptcy filing by the tenant.
One way that a landlord may be able to challenge a tenant's claim of force majeure is if the tenant fails to strictly comply with any notice provisions contained in the lease. A lease may require prompt notice of a claim of force majeure and failure to provide adequate notice under the lease is a legal defense to force majeure claims that has been upheld in some jurisdictions. However, with many retail businesses closed due to the pandemic, a court may find that complying with a notice provision is an impossibility given the current state of affairs.
Can a Landlord Rely on Force Majeure for Delays in Construction and Delivery?
The coronavirus pandemic may prevent a landlord from meeting its construction and delivery obligations under the lease. Landlords should determine what their rights and remedies are under the lease if permits and materials are delayed or the workforce is unavailable due to government directives. It is recommended that the landlord review the specific lease language to determine whether force majeure terms excuse the delay or failure to perform under any of these scenarios, such that the landlord is not penalized for late delivery.
Practical Considerations for Landlords Beyond the Lease
In these uncertain times, landlords should be mindful that it may not be easy to re-let unoccupied space. The COVID-19 pandemic may be relatively short-lived or may continue for months. In any event, landlords may not wish to alienate or lose important anchor tenants or other key tenants, who may have long-term leases and who may not be easily replaced. Landlords should consider the position in which they may find themselves when the restrictions are lifted, Americans get back to work and their tenants are able to resume daily business.
Landlords may seek to work closely with their tenants to get through these challenging times in ways that benefit all parties. For instance, landlords should educate themselves about resources available to their tenants. Landlords should also be aware of the recent bipartisan passing into law of the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Certain provisions of the CARES Act may provide the necessary economic relief to help businesses pay their rents in the short term, among other things.
Given that the landlord's remedies hinge mainly on state law and the specific contractual language, review of the specific lease language will be decisive in determining whether the landlord has a viable defense to a force majeure claim. As this is an evolving area of the law specifically with respect to cases related to COVID-19, and especially given some states' current moratoriums on court proceedings, it is recommended that landlords speak with counsel to discuss any issues that may trigger the force majeure or other provisions of leases stemming from the coronavirus pandemic.
1 Williston on Contracts