The landlord-tenant relationship in the time of COVID-19 is tenuous at best. With governmentally enforced business shutdowns through shelter-in-place orders, expert recommendations to socially distance, retail store mass closures, and other economic challenges, there is substantial stress on all sides of the commercial real estate market.
Business Interruption Insurance. Many tenants and landlords initially question whether their business interruption coverage extends to loss of rents or income. However, many insurance policies exclude contagious disease or simply do not list that event as a covered peril. Right now, we believe there is good reason to file a claim even if you are not sure there is coverage. (See our article on this issue: Why Everyone Should Tender a COVID-19 Business Interruption Claim to Their Insurers). We are monitoring proposed legislation in New Jersey, and potentially other areas of the country, to force insurers to cover this loss notwithstanding policy language. Even if passed, however, the legislation will face constitutional challenges. There has also been advocacy that this kind of exclusion should be void as a matter of public policy.
Tenant Considerations. Already, we have seen tenants: (i) advocate that coronavirus governmental shutdowns relieve them of paying rent under force majeure contractual provisions; (ii) claim that the governmental shutdowns are acts of temporary taking or condemnation, which trigger rent relief provisions in the lease; and (iii) assert the lesser known common law doctrines of impracticability, impossibility, and commercial frustration. These types of claims and their underlying basis require a review of the particular circumstances and lease language, which might give rise to these claims and defenses.
For more information on COVID-19 as a force majeure event and the doctrines of frustration of purpose, impossibility, and impracticability, see our articles here: The concept of force majeure is more likely to provide relief from construction or other deliverable (i.e. non-monetary) deadlines, than it will be to provide rent relief. If a tenant is required to open a business, obtain a permit, or hit a date certain for tenant improvements, temporarily excusing those types of deadlines present a stronger argument under a force majeure clause (if the force majeure clause applies to global contagion or pandemic).
Landlord Considerations. Landlords have continued responsibilities of rent collection, maintaining loan obligations, and their financial duties to investors. Landlords could use some of the aforementioned tenant arguments to delay or get relief from loan payment obligations, but a close review of the landlord's loan documentation should come first.
Landlords have numerous remedies under their leases, but consideration should be given to the increased risk of tenant bankruptcies and whether or not to apply security deposits against unpaid rent. If a landlord applies a security deposit within 90 days of a tenant’s filing for bankruptcy protection, that application could be deemed a preference payment, subject to claw back from the trustee or debtor in possession, although there are exceptions and defenses to preference claims. We have counseled numerous landlords on how to manage risk of application with exceptions from clawbacks and the alternative approach of holding the security deposit until bankruptcy is filed and then applying the deposit to lease rejection claims.
What Should Landlords and Tenants Do?
- Review your lease and loan documents for specific applicable language to the doctrines referenced above.
- Review your insurance coverage. If you have Business Interruption or Rent Loss Coverage, consider filing a claim: Why Everyone Should Tender a COVID-19 Business Interruption Claim to Their Insurers.
- Contact your legal counsel to review your options as applied to your circumstances.
- Assert your rights and remedies and be prepared to negotiate.
Solutions. We expect to see various forms of workout restructuring of lease obligations. In the 2008 financial recession, we saw landlords and tenants provide each other with concessions such as: rent abatements tied to additional rent payments during the life of the lease, rent reductions, term extensions (in exchange for abatements), and posting of additional security (i.e. guaranties) in exchange for concessions. We believe through advocacy, negotiation, and positive sum strategies that it will be possible for parties to get what they need, albeit less than what they want.
Various legislative efforts are in the works for financial support that may simultaneously help tenant businesses survive and ease pressure on landlords and their lenders. We at Ice Miller LLP are closely monitoring and intimately involved in those efforts.