Tenant Leasing Illustrated – April 2020 – Back-Up Goalies and COVID-19 Preparation

As the COVID-19 coronavirus wreaks havoc with our day to day activities and financial markets, our thoughts and prayers go out to those who are ill and struggling. As part of their effort to mitigate the fallout, businesses should review their leases and other related agreements.

In today’s issue, we provide five suggestions with respect to your commercial lease and COVID-19.

Sincerely,

Alan Katz
Mintz & Gold LLP

Back-Up Goalies and COVID-19 Preparation

I am sorry but I do not get hockey.

I do not understand offsides or the blue line or icing (isn’t that supposed to go on top of my cake?) and the puck moves too fast for me to see it.

Three periods?!! What other sport has three periods?

And why play it on ice? So slippery. Wouldn’t it make more sense to just run around like all the other professional athletes?

But hockey has something no other sport has. The emergency back-up goaltender.

You see the National Hockey League has the home team keep an extra goalie around in case one of the teams loses their regular goalies to injury.

The NHL is like a well-prepared, ready for anything girl scout. The back-up is an ordinary “just in case” guy who theoretically could end up playing for either team.

He mostly watches the game and eats nasty food since he is almost never needed until… along came David Ayres.

David is the operations manager and Zamboni driver for the Toronto Maple Leafs and was called upon to play for the Carolina Hurricanes in a recent game.

At 42 years old, David stopped eight out of ten shots and got the win!

Calling Disney, but David is also a kidney transplant recipient and the Hurricanes are now selling his t-shirt and donating the proceeds to a local kidney foundation.

David does play rec hockey but come on, who even thought this up?

Could the Lakers bring in the guy working the scoreboard to back up Lebron if he gets the sniffles?

Could my New York Mets bring in any schlub selling peanuts to replace their starting pitcher? Okay, maybe a bad example.

These days as our world is being turned inside out by the COVID-19 coronavirus, preparation is more important than ever.

Already many of us are working remotely, social distancing and avoiding mass transit, airplanes, restaurants and large gatherings.

Broadway, museums, concerts and even the NBA, MLB, NHL and March Madness have suspended operations (although the NBA may have stopped just to spare the Knicks any further embarrassment).

As all businesses look to mitigate disruptions to their operations caused by COVID-19 from staff working remotely, reduced travel and interrupted supply chains, one area that should not be overlooked is the potential inability of tenant businesses to perform under their leases and related agreements and the inability of other parties, such as landlords and contractors, to themselves perform.

No lease or construction contract will directly address a global pandemic, but we have discussed force majeure provisions in past newsletters (translated as “superior or irresistible force”) and it is important for tenants to try to mitigate risks now to avoid force majeure issues down the road.

Force majeure refers to events that prevent a party from meeting its obligations due to labor troubles, “acts of God”, terrorism and other circumstances reasonably beyond the control of the party in question.

Usually force majeure excludes results caused by such party in question or anyone acting through or on behalf of such party and excludes a party’s financial condition or lack of funds.

To determine if force majeure is applicable, courts generally will look at the language of the lease or contract, whether the non-performance could have been anticipated and mitigated and whether non-performance really was unavoidable.

In addition to force majeure, addressing COVID-19 may require discussions with your landlord and contractors to work together to solve potential problems before they become issues and a review of your insurance coverage. There also may be common law doctrines of impracticability, impossibility and frustration of purpose that may come into play but which are beyond the scope of today’s newsletter.

Avoid getting hip checked by COVID-19 by taking these five suggested steps to prepare:

Review your lease. Most leases provide that if the landlord is unable to fulfill, or is delayed in fulfilling, any of its obligations under the lease due to a force majeure event, the tenant’s obligations will not be affected and the landlord will not have any liability to the tenant. But the actual language of the force majeure provision must be reviewed to determine where you stand.

Some leases include outside limits on force majeure extensions for certain landlord performance milestones since even if beyond your landlord’s control the entire burden should not fall upon you (e.g., if the landlord cannot deliver your turnkey premises you may need to move on).

Some leases include an exception if a force majeure event could have reasonably been anticipated and if your landlord could have mitigated its effects.

Prompt notice may be required after the occurrence of a force majeure event as a prerequisite to any extension.

Some leases prevent separate extensions as a result of each one of a number of concurrent force majeure events (i.e., only actual delays apply).

Your landlord may be required to take all commercially reasonable steps (including spending additional sums for overtime) to address the delay.

Review your construction contract. If you are building out your initial tenant improvements you may find that your contractor will invoke force majeure to address delays caused by quarantines affecting its workers and travel restrictions and business closures that affect its supply chain. Most construction contracts have similar force majeure provisions regarding industry-wide labor disputes, fire, unusual delivery delays, extraordinary adverse weather conditions and other causes beyond the contractor’s control and these contracts should also be carefully reviewed.

Anticipate potential issues up front. Think ahead so that you can address concerns with your landlord or contractor before problems arise. All steps to mitigate risks could be part of a court’s determination as to whether or not non-performance was unavoidable.

Inability to pay monies due is never a force majeure event. If changes in the business climate (a particular problem for retail tenants) will reduce your cash flow, raise these issues with your landlord or contractor early in the process.

You should review the cleaning requirements in your lease for both your premises and building common areas, although notwithstanding these requirements you may want to push your landlord to provide additional cleaning to stem the spread of the virus.

As supply chains are disrupted and workers become unavailable, your contractor may not be able to meet important tenant improvement deadlines. Find out whether this is the case early on so that potential problems can be mitigated.

Review your insurance coverage. Business interruption insurance is insurance coverage that replaces business income lost in a disaster, not as a separate policy but as an addition to your property/casualty policy or included in a comprehensive package as a rider or additional coverage. It can also cover fixed expenses and costs of temporary relocation. Although generally intended for natural disasters or physical damage, you should contact your risk management/insurance professionals and review your policies to confirm if COVID-19 related losses might be covered (viruses have often been excluded since the SARS outbreak) and your notice requirements.

Future leases and construction contracts. If you are entering into a lease or construction contract with important milestones over the next six to 18 months, you may need to draft force majeure provisions that protect your interests and address COVID-19. One approach might be to specifically include COVID-19 (or the classification of any other virus or similar outbreak as a “pandemic” by the World Health Organization) as a force majeure event.

Benjamin Franklin said “By failing to prepare, you are preparing to fail.” Follow the suggestions above and prepare for the challenging times ahead. Hoping you all stay safe.