Tenant Leasing Illustrated – May 2020 – COVID-19 Marches On

Hello,

COVID-19 continues to turn our world upside down. In addition to the health consequences to so many and their caregivers and first responders, on a more mundane economic level, many commercial tenants have come to us as they struggle to pay their April and May rent.

In today’s issue, we provide seven suggestions with respect to commercial leases as tenants wrestle with the COVID-19 crisis.

Sincerely,

Alan Katz
Mintz & Gold LLP

COVID-19 Marches On

Another week in COVID-19 captivity as the days all blend into each other.

No complaints; as the meme goes, the greatest generation was called to war and many of us are only being asked to sit on our couch. We can do this!

That is not to say that the world has not gotten a bit weird.

I am social distancing with my wife Robin and one of our sons, Jordan, who caught one of the last planes out of London and at 26 has not lived at home since he was 17.

According to the Wall Street Journal, this has become a common occurrence in a lot of families.

Talk about awkward flashbacks. As I tell Jordan, one step forward, ten years back.

As the pandemic has wreaked havoc on people’s health, on so many health care professionals and essential workers and on our economy, it has become foremost on everyone’s mind.

We talked in our most recent newsletter about how the COVID-19 pandemic is also affecting commercial leasing and we now have some updates for you.

Unfortunately, as we have looked at this question over the past few weeks, we have concluded that leases generally do not allow tenants to avoid paying rent even in a pandemic.

That is not to say that each lease should not be reviewed, since we have seen some provisions that can provide a colorable claim for abatement, but in general abatement will only be available due to fires and other casualties or failures by landlords to provide services or make repairs and most force majeure provisions are not helpful.

There may be common law concepts of impossibility and frustration of purpose that apply but these have limitations and are untested regarding COVID-19.

And to top it all off, business interruption insurance policies generally exclude pandemics (since the SARS outbreak).

All that being said, many tenants (particularly retail tenants) are withholding rent notwithstanding the provisions of their leases and notwithstanding the obvious risks.

As you review your own leases to try to cope with the current crisis, avoid getting a COVID-19 haircut by considering the following seven suggestions:

  • First, don’t panic. Although the legal consequences of failing to pay rent in each particular situation cannot be predicted, in New York (and many other jurisdictions), commercial evictions have been suspended until the middle of June and all of the courts are closed and not accepting papers. Once the courts open, there will be a significant backlog and it is expected that pre-COVID-19 cases and post-COVID-19 cases that do not involve non-payment of rent will be addressed first.
  • Review your lease. Although a well drafted landlord’s lease form will not provide any plausible defenses, some abatement provisions that were no doubt intended to only cover failures of the landlord to provide services or make repairs are written broadly enough to potentially cover untenantability in other circumstances.
  • Force majeure. Many tenants have asked us to look at force majeure as a possible defense but New York courts construe these provisions narrowly and will generally excuse nonperformance only if the triggering event is unforeseeable, specifically identified (e.g., the clause specifically mentions a pandemic or similar event) and outside the party’s control. In addition, most force majeure clauses expressly carve out the payment of rent.
  • Examine common law defenses. Even after the 9/11 attacks and Hurricane Sandy, New York courts have not ruled upon common law contract defenses in the commercial lease context, but such defenses may potentially be relevant.
    • Frustration of Purpose. A contract, while technically performable, may be excused based on the absence of an underlying assumption that induced the contract (i.e., no catastrophic worldwide pandemic preventing use) such that the transaction would not otherwise make sense. So, although the frustration doctrine would not necessarily work for a lease that contemplated operating a restaurant (because the premises could still be used lawfully for takeout, even if not profitably), it might work for an office lease.
    • Impossibility. In New York, the defense of impossibility is hard to prove since the event in question must be unforeseeable and objectively destroy the subject matter or the means of performance of the contract; economic hardship is not enough. Impossibility may also not work since many leases include what one of my litigation partners joyfully calls a “hell or high water” provision, meaning the obligation to pay rent is absolute and unconditional. This dovetails with the common law view that leases are conveyances of property and that the tenant has expressly assumed the risk of loss.
    • Defenses in other jurisdictions. Some states (not New York) recognize a related defense of commercial impracticability which does not require objective impossibility and looks at whether the unanticipated event resulted in excessive and unreasonable difficulty. Some states also have statutes that may provide additional defenses to supplement the common law defenses.
  • Contact your landlord. We have suggested that tenants contact their landlords to say that they cannot pay and are working to preserve their business in uncharted waters but very much want to continue as a tenant and hope that something can be worked out together. Some landlords are working with their tenants either by agreeing without waiving any of its rights to defer rent or at least not start legal proceedings. Others are sending default notices and threatening to resolve the matter in court. Landlord/tenant practitioners have suggested making written settlement offers now which include offers of partial payment and that can be introduced into evidence later. Paying some amount towards rent has been recommended by practitioners to show courts good faith intent, especially for office tenants that are operating remotely and bringing in some revenue.

  • Research governmental programs. Federal, state and local governments (New York included) have enacted or are in the process of considering legislation to provide loans and other assistance to tenants. These programs are beyond the scope of this newsletter edition, but include the U.S. Coronavirus Aid, Relief, and Economic Security (CARES) Act and Paycheck Protection Program (PPP).
  • Do not lose hope. Landlord/tenant practitioners in New York expect the courts to issue post-COVID-19 guidelines which, among other things, would in the case of tenants with proven COVID-19 hardships pressure the parties to settle with a judgment in favor of the landlord with respect to past-due rent and a stipulation allowing tenants a repayment plan over time (12 months has been suggested). Some rent forgiveness may also be possible, but less likely unless a plan is in place to assist landlords with their taxes, mortgages, etc. There will also likely be additional legislation that could prove helpful.

Yes, the world has certainly gotten weirder. Mintz & Gold is now accepting payment of legal fees in toilet paper. But in all seriousness, our hearts go out to those who are ill or have family that are ill and hats off to the health care professionals, police, firefighters, EMT, postal, grocery store, delivery and other workers who continue to keep our odd new world running. Just like all the people coming out at 7:00 pm every night to cheer, we are (virtually) clapping right now.