Companies everywhere are working diligently to analyze potential risks during these challenging times. The growing number of business disruptions and state-ordered shutdowns in the wake of the COVID-19 pandemic is putting a strain on commercial landlords, their lenders and tenants. Lease provisions should be analyzed to determine if there is language addressing what landlords and tenants can and cannot do to avoid breaching their leases. As April 1 approaches, a number of landlords and tenants are questioning their respective obligations. Each lease is different and may contain unique provisions, so parties should consult with counsel for additional guidance. Below is a list of provisions to consider.
- Continuous use/go dark/operating hours. If a lease contains required hours of operation or obligations to remain open and operating, tenants should notify landlords if they elect to close in response to government orders or concerns for the safety and health of employees and customers. This is particularly relevant for retail tenants, but may apply to some office or industrial tenants as well. If the lease contains a force majeure provision (see below), the tenant can likely rely on such provision to avoid being in default and should inform the landlord accordingly.
- Force majeure. Force majeure clauses provide parties with some relief if they are unable to perform their obligations due to certain events, which are often specified to include acts of God, strikes, government actions or other causes outside the reasonable control of the parties. Landlords and tenants should review their force majeure provisions carefully to determine whether emergency measures taken in response to COVID-19 may excuse or delay performance. Notably, however, most force majeure clauses do not excuse payment obligations. As a result, tenants are generally not relieved from paying rent even if a state-ordered shutdown qualifies as a force majeure event. Read our Applicability of Force Majeure and Related Doctrines alert for additional information.
- Damage, destruction and other
casualty. Commercial leases usually include a provision
which outlines the obligations of the landlord and tenant in the
event the leased premises are damaged or destroyed by fire or other
casualty during the term.
Landlords are typically required to repair and restore the premises following a casualty, but often have some level of discretion in deciding how to proceed depending on the extent of the damage or destruction. The landlord's obligation, for example, may depend upon its receipt of insurance proceeds or the extent of the damage or the length of the term remaining under the lease. Some leases may grant the landlord or tenant the right to terminate the lease in certain scenarios, such as when the damage is extensive or occurs near the end of the lease term, or if the casualty causes the premises to be untenantable.
In general, if the landlord elects to repair and restore the premises, the tenant remains obligated to pay rent during the period of restoration – provided, however, that some tenants are able to negotiate a proportionate abatement of rent during the period following the casualty when the premises are untenantable and/or the landlord is repairing the property until the premises are restored.
Whether or not the damage, destruction or casualty provision of a lease will be applicable during the COVID-19 crisis – in light of building closures and shelter-in-place orders propagating throughout the country – will depend on the specific language of the lease. Casualty provisions are typically written to cover damage caused by fire, floods or other natural disasters, but not cases where the physical building remains intact, such as the case may be during a pandemic. Because every lease is different, it is worthwhile to confirm the specific language of the provision before engaging the other party.
- Hazardous
substances. Many commercial leases contain hazardous
materials clauses, which generally prohibit the use, storage or
manufacture of hazardous materials on the premises by the tenant
and require the tenant to indemnify landlords from and against any
loss or damage resulting from the tenant's failure to comply
with the provision. The definition of hazardous materials varies by
lease, but usually includes hazardous or toxic wastes or materials
or similar substances, as defined by environmental laws. Sometimes
leases also impose a similar obligation on the landlord, requiring
it to comply with environmental laws and indemnifying tenant from
any costs associated with the presence of hazardous materials in
the premises or building that were not introduced by the tenant.
However, this is often specifically negotiated by a tenant into the
lease and is not considered standard language.
Some tenants may argue that the presence of the COVID-19 virus in the building would violate the hazardous materials provision. The efficacy of this position depends on the precise language of the lease, since the definition of hazardous materials does not normally include bacteria, viruses or other diseases. However, tenants may argue that in cases where landlord provides or arranges for the cleaning and/or janitorial servicing of the premises and building, the landlord is thereby obligated to take certain measures to prevent the spread of COVID-19 throughout the building, including heightened cleaning requirements, minimizing the number of guests and vendors allowed into the building, and posting notifications and preventive steps.
- Quiet enjoyment. Leases frequently include a covenant of quiet enjoyment, whereby the landlord covenants that the tenant's use of the premises will not be disturbed provided the tenant has complied with its obligations under the lease. In the event a landlord elects to close the building in which a tenant's premises are located (absent government intervention), it may be considered a breach of quiet enjoyment. On the other hand, if the building is closed to the public, but the tenant is still permitted to access the building for its own use, the covenant is not breached. But landlords should also consider whether limited closures and restrictions may constitute a breach of other lease provisions such as landlord's obligations to provide certain amenities or services (see below).
- Surrender obligations. If a lease will expire during this period of uncertainty, tenants should consider surrender provisions and the obligation to remove furniture from the space. In the event it is impossible for a tenant to remove its personal property and fully vacate the premises, or the tenant is expecting to be liable for holdover costs, a well-drafted force majeure provision will hopefully excuse a potential tenant default if the building is closed by the landlord or state. But there are open issues if the tenant's failure to surrender the premises is due to other causes.
- Interruption of services and
other landlord obligations. Most commercial leases
stipulate the services the landlord is obligated to provide to the
tenant as well as landlord's maintenance obligations throughout
the term of the lease. For example, the landlord is often
responsible for performing structural repairs to the building,
maintaining common areas and providing elevator, HVAC, water and
janitorial services to the premises. Public utilities, such as gas
and electric, are not usually provided by the landlord itself;
instead, the landlord is required to ensure that the utilities are
available at the premises, and the tenant either pays its share of
utilities or procures and pays for its own utilities directly with
the service provider.
If the landlord fails to provide services or perform its maintenance obligations under the lease, the tenant is typically required to notify the landlord of the failure, and the landlord is entitled to a cure period to remedy the failure. Sometimes, however, leases include what is known as an "interruption of services" provision, entitling the tenant to rent abatement in the event of a material disruption of utilities or services to the premises. What constitutes a material disruption will vary by lease, but is typically one that lasts a minimum number of days, prevents the tenant from using the premises for its business and is not caused by the tenant. Note, however, that some leases do not provide for rent abatement in this scenario and, instead, have the parties opt to rely on property and business interruption insurance against this type of risk. In the absence of an interruption of services provision or other remedy, tenant would be required to continue to pay rent during any period of interruption caused by the COVID-19 pandemic.
Finally, in addition to an interruption of services provision, a lease may contain a landlord default clause, giving the tenant some form of remedy in the event the landlord fails to perform its obligations under the lease and the failure continues for a certain period of time following written notice from the tenant. Remedies vary, but may include options for the tenant to perform self-help and seek reimbursement from the landlord for its costs, bring an action in equity or law, or recover damages from the landlord.
- Insurance. There has been quite a bit of discussion regarding business interruption insurance. While each insurance policy is unique, most policies require some kind of physical damage to the property and many exclude events such as pandemics from coverage. Other policies, such as professional liability and pollution liability, may be applicable to the COVID-19 emergency, depending on the circumstances, so it is important to get assistance reviewing the language in your policy to make sure there are no missteps before filing any claims. In addition, there are policies that specifically cover interruptions due to communicable diseases or infections. However, they are quite costly (8 – 10% of the coverage) and are rarely purchased as a result.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
