COVID-19 and its implications on commercial lease obligations
COVID-19 has caused great uncertainty for landlords and tenants as to how their commercial lease obligations are being impacted by this spreading virus. Namely, what rights do tenants have if they are unable to open their doors as a result of either government prohibition or a more general fear of the virus’ possible harms? With regard to landlords, what remedies are available if they are under leases to one of the thousands of tenants that have witnessed their businesses upended as a result of the virus’ impact?
Some lease clauses both parties should consider include the following:
1. Force majeure.
Most leases will include a provision, usually referenced as the force majeure section, which outlines how and when unforeseen circumstances excuse the nonperformance of lease obligations by the parties. As a general rule, these circumstances are interpreted narrowly and typically include acts of God, war, labor strikes and governmental restrictions. Have the tenants been prevented from conducting business because of governmental restrictions? Is the virus an act of God? Does your lease release tenants from their rental obligations? How this force majeure section is written will be critical to determining what the parties’ obligations are in light of the virus.
2. Set off and rent obligations.
It is very likely that the virus has prevented both landlords and tenants from performing some or all of their obligations under the lease. Most leases do not provide tenants relief from rental obligations due to force majeure (though nothing prohibits such a provision should the parties write the lease in such a manner). If landlords are unable to perform certain obligations, do tenants have the right to set off their rent obligations against landlords’ nonperformance? The rent section, remedies section, and any lease provisions that touch on setoffs, should all be scrutinized carefully by the parties to determine their rights in light of the virus.
3. Loan covenants.
Understandably, landlords and tenants may seek to work out revised lease terms to avoid a tenant default and/or litigation in the event the virus has rendered either party unable to perform. In such cases, landlords should review any loan covenants that involve their lease premises as any generous tenant concessions could possibly violate the landlord’s loan covenants.
COVID-19 has caused considerable uncertainty for the entire real estate industry. Our firm is working with many clients that are navigating through this uncertainty. We are monitoring pending legislative action and court filings on real estate matters that relate to COVID-19. Please do not hesitate to call us if you have questions about how you and your business can best navigate through the unprecedented circumstances that have been caused by COVID-19.
Client Alert authored by: Kevin M. Coyne, Principal
A special thanks to Chuhak & Tecson law clerk Daniel Etman for his contribution to this article.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.