What Should Landlords and Tenants be Doing in the Face of the COVID-19 Pandemic?
Health and Safety First
This cannot be more obvious. The health and safety of employees, tenants, their employees, and guests is first and foremost.
Review Your Leases
Maintenance and Cleaning
Review your leases to determine what obligations each party may have with respect to maintenance and cleaning. On one extreme, triple net leases will place that obligation on the tenant. On the other extreme, multi-tenant office buildings, retail, and residential will distribute those obligations to landlords and tenants in accordance with control of space, with landlords typically having responsibility for common areas and tenants having the responsibility for their premises. Regardless of which party is responsible, make sure to comply with guidelines set by the Centers for Disease Control and Prevention. National real estate trade associations also provide industry sector guidance.
Does a tenant have the right to cease operations on the premises? Many retail leases contain “continuous operation” provisions, which require the tenant to remain open for business. Mandatory government shutdown orders (such as for restaurants, bars, gyms, etc.) will cause these provisions to be reexamined. This is a pandemic, so courts may be more likely to exercise its equitable powers to limit enforcement.
Does the lease have a “force majeure” provision and, if so, does it cover COVID-19? Does it completely eliminate a party’s obligations, or does it just delay performance? If a party desires to claim a limitation of obligations based on force majeure, does the lease require it to provide written notice to the other party? If so, what is the notice required to state (e.g., reason for the claim, when the claim will take effect, etc.)? Is the other party’s consent required?
If applicable, does the force majeure provision excuse the tenant from paying rent? Most leases either expressly exclude rent payment from the operation of the force majeure clause or provide that irrespective of any other provision in the lease, the obligation is unconditional and independent of all other provisions of the lease (which would include the force majeure provision). Again, because we are dealing with a pandemic, courts may be more likely to exercise its equitable powers to limit enforcement.
The effect of COVID-19 on tenant businesses cannot be understated. If the tenant cannot pay rent, has the lease been guaranteed? If so, is the guarantor viable? While guarantees are important, guarantors typically step into the shoes of the tenant and, therefore have the same defenses. Landlords must also determine the type of guaranty given by the guarantor. For example, is the guaranty limited to collection, is it a “burn-off” guaranty, or is it an unconditional and irrevocable payment and performance guaranty?
HVAC and Building Systems
Does the lease include any representations or warranties about indoor air quality or the fitness of HVAC and building systems? If so, whose responsibility is it to maintain, repair, and replace those systems?
Compliance with Laws
Most leases require the parties to comply with federal, state, and local laws. How does the lease allocate those responsibilities (e.g., as to the “premises” and the “common areas”)? Do mandatory government shutdowns come within the lease’s definition of “laws”?
Does the lease require the parties to cooperate with public health authorities?
If a tenant fails to comply with a government shutdown, does the landlord have the right to shut down a tenant’s business?
Review Your Loan Documents
Review your loan covenants. For example, debt-to-income and loan-to-value requirements. If a landlord has tenants that are unable to pay all or a portion of their rent, this will, most likely, affect those covenants. Early communication with both tenants and lenders is critical. All parties must be on the same page. If the landlord and tenant desire to revise a lease, the lender should be involved in the discussion.
Communication and Cooperation
No matter what, the most important things that landlords, tenants, and lenders must do is communicate and cooperate with one another. Leases and loans may need to be restructured. While lease or loan documents may be quite clear on a party’s obligations, applying the strict letter of the agreement may not be best for the parties. We’re all in this together and we’ll need to rely on each other to get through this, which we will.
If you have any questions, please do not hesitate to contact the author or visit our COVID-19 Resource Center.