On behalf of Sayer Regan & Thayer of Sayer Regan & Thayer, LLP posted on Thursday, October 1, 2020.
Nearly all businesses operating out of physical real estate spaces have been impacted by COVID-19. If you are a commercial tenant or landlord, you may be concerned about your rights and obligations that fall under your commercial lease.
The main concerns for tenants include costs and cashflow. For many small businesses, rent is the #1 overhead cost after paying salaries. As a result, they are faced with having to set up shop remotely, changing their whole business model in many cases, while still being expected to make timely rent payments. They also have to think about how they can access the premises to clean, as well as how their potentially new service offerings will be impacted by change of use rules.
The main concerns for commercial landlords include costs and cashflow, to be sure, but they are also concerned about their obligations to continue providing services to their tenants while meeting financial obligations to their lenders. Many tenants who have had to close up their physical locations and who had experienced big losses in terms of income can’t pay their rent as a result.
Landlords understandably want to guarantee that they receive some level of payment in order to secure future repayment to recoup any losses they suffer. They also have to consider the mitigation of their losses, knowing full well that finding an alternative, fully-paying tenant post-pandemic will be extremely difficult if not impossible.
Understanding the other party’s concerns and positions are important to working out any key successful negotiations so that everyone can move forward together to reach a mutually agreeable outcome.
Both commercial tenants and landlords, particularly in the retail, hospitality and restaurant industries, are going through uncharted territory in the wake of the coronavirus pandemic. They have faced (and many are still facing) supply chain issues, limits on occupancy levels and business closures ordered by the government – all of which are resulting in an unprecedented level of uncertainty when it comes to lease obligations.
All leases come with a provision – known as a force majeure or “Act of God” clause – that addresses unexpected and unforeseeable situations that could impact either a tenant’s or a landlord’s ability to meet their individual obligations. But you may wonder if your lease’s force majeure clause applies to COVID-19, and if it will relieve you of continuous operation requirements or rent payments.
Here are some of the primary lease issues facing tenants and landlords:
- The COVID-19 outbreak, and the subsequent impact on business, is covered by most standard commercial lease force majeure clauses, even when not specifically stating “pandemic” or “widespread disease.” The key to whether the clause is applicable will lie in the nature of the events being within the reasonable control of the landlord or tenant.
- If either party wishes to invoke the force majeure clause in their lease, they will have to provide notice.
- Most force majeure clauses offer additional time to allow one party to perform its duties but don’t normally excuse a party from those duties. This could impact several issues, particularly when it comes to timing on delivery of space, compliance and construction pertaining to continuous operation clauses.
- Rent obligations are usually not covered under a force majeure clause, due to the use of additional language or a provision in the lease requiring rent payment despite other provisions that may have excused it.
- Those who have business interruption insurance are advised to check if events related to COVID-19 will be covered. Usually, damage or destruction of property triggers business interruption insurance; however, some policies may also cover actions by civil authorities.
There’s no doubt that the COVID-19 outbreak has had, and will continue to have, considerable economic impact on commercial tenants and landlords. Commercial leases are complex and difficult to navigate on a good day, let alone during a global pandemic when there are so many uncertainties.
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If you have questions about your commercial lease, and before engaging in significant deviations from your lease obligations, please contact us for your free initial consultation.
These materials have been prepared by SRT for informational purposes only and are not intended and should not be construed as legal advice.