Published on May 07, 2020
Written by Melissa K. Page Boeshans
Thousands of leased workspaces across America have been empty for weeks as stay-at-home orders blanketed the country, at one point covering nearly 95 percent of the U.S. population. Everything from office buildings to laboratories to manufacturing plants to retail stores have been shuttered as society does its best to control what is perhaps the most serious public health emergency in a century.
Even now, as states slowly begin to reopen aspects of their economies, the effects of the pandemic on commercial leases remains in many ways unknown. Rent and mortgage payments have in many cases been postponed, either through government mandate or through agreements between landlords and tenants directly. But long term, the rights and obligations under commercial leases are largely still in place, raising the question of how exactly landlords can protect themselves without bankrupting the very tenants they rely on to make payments.
Given all the challenges COVID-19 poses to landlords and tenants, communication between parties is probably the single most important ingredient for successfully navigating this crisis.
Both parties to the lease have been negatively impacted by this event, so communicating directly about those impacts can enable productive discussions that allow the parties to reach mutually acceptable agreements to help them both get through the crisis. For example:
Now, when working out any deals with tenants, landlords must keep in mind that lenders may have requirements the landlords need to satisfy. For example, the contract between landlord and lender may have certain debt-to-income ratios or other covenants that require a certain amount of rental revenue every month. Any deals landlords strike with a tenant will still need to allow the landlord to meet these lender requirements, unless the landlord also modifies the deal with the lender.
When taking practical steps to work out arrangements with tenants, landlords should ask tenants to provide proof that the tenant is making good faith efforts to remain in business. This proof could include evidence that the tenant has obtained or is trying to obtain relief from government programs and/or insurance companies. The landlord should also get it in writing that the tenant agrees to pass those benefits along to the landlord as soon as practicable.
Most commercial leases contain force majeure clauses, which often provide for the suspension or postponement of one or both parties’ obligations in the event that circumstances beyond either party’s control make contractual performance impossible.
Every force majeure clause is different. If a clause is highly specific, i.e. it lists specific events that activate the clause, then its more likely that courts will only apply the clause if a pandemic is one of the specifically listed events.
If the clause is more general and uses broad terms like “act of God” or “things outside the parties’ control,” then most likely the situation will be governed by the law of the state specified in the contract’s choice of law provision.
If a tenant relies on a force majeure clause to try to avoid paying rent, it is the tenant’s burden to prove that the pandemic qualifies under the contract’s force majeure clause. Notably, some force majeure clauses in commercial leases require rent payments, even when occur that are outside the tenant’s control. At the end of the day, it’s all about what the lease says and how it’s interpreted.
In commercial leasing, landlords have historically had more relative power than tenants. But COVID-19 has leveled the playing field. Both landlords and tenants are simply trying to make it through to the other side right now. As such it is beneficial for both parties to work together to reach agreements that allow them to weather this pandemic. Working together now means tenants have a better chance of staying in business, which in turn provides landlords with the security of knowing that their revenue streams will stay intact as the economy begins to recover.