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Commercial Leasing and Covid-19

Over the last week, we have spoken with landlords, tenants, and brokers about the prevailing question in the industry: is rent due and payable for those “non-essential” businesses forced to close up shop by the “New York State on Pause” order? And what about for businesses deemed “essential,” but effectively run out of business by the virus’ far-reaching impact?

These questions, and others like them, are bound to be debated by commercial real estate actors and, ultimately, the courts for a long time.

Which contractual provisions could serve as the basis for a change in the rent due?

Commercial tenants and landlords should carefully review their leases for relevant provisions. Some key contract provisions that may be affected by the recent events include representations/warranties, covenants, termination rights, conditions, force majeure clauses, or “change in law” clauses.

  • If applicable, review the force majeure clause. Typically, the payment of rent is not excused due to a force majeure event in a lease, so even if a “pandemic” or “epidemic” is in the definition of a force majeure clause, tenants are usually still required to pay rent. Force majeure may excuse certain non-monetary obligations.
  • If force majeure applies, check the notice requirements in the lease.
  • Check for provisions that trigger deferred rent or rent abatement (for instance, failure to give possession). Most leases do not have a general rent abatement provision for a tenant’s inability to operate.  Such abatements are typically limited to loss of services that prevent a tenant’s operations due to landlord’s conduct.

What common law defense might tenants invoke to argue for changed rent terms?

Landlords that elect to pursue defaults and associated judicial remedies will undoubtedly be faced with the defenses of Impossibility, Impracticability, and Frustration-of-Purpose on the part of the tenant.

  • Impossibility – In general, the doctrine of Impossibility excuses a party’s performance only when the subject matter of the contract or the means of performance renders performance objectively impossible. The impossibility must be the result of an unforeseen event that could not have been protected against in the contract. The defense of Impossibility is applied narrowly and it is unclear whether courts will apply it here.
  • Impracticability –Courts may also discharge contractual duties when performance is rendered impracticable from a commercial perspective as a result of a supervening event. To invoke this doctrine, the supervening event must not have been reasonably foreseeable when entering a contract, and as a direct result of the supervening event, a party’s ability to perform has become infeasibly difficult or expensive. Similar to Impossibility, financial difficulty or economic hardship alone is not enough to establish the defense of Impracticability.
  • Frustration-of-Purpose – The defense of Frustration-of-Purpose, a related defense, “‘applies when the frustrated purpose is so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.’” Courts have relied on this doctrine to invalidate a lease where the building’s certificate of occupancy did not allow for commercial use.

Practical Considerations and Viable Solutions

  • Review Business Insurance and Commercial Property Insurance Policies to determine whether Business Interruption Coverage applies.
  • Landlord Rent Deferrals – A landlord may defer rent by either requiring tenant to repay at a later date or increasing subsequent payments once the deferment period has ended.
  • Tenant Rent Abatement or Reduction – Tenants may seek an abatement or reduced rent instead of a deferment.  In doing so, tenants may use the above common law doctrines as leverage in their negotiation.
  • Who delivers the request and how? Decide whether you, as landlord or tenant, want to reach out to your counterpart directly or whether you want your broker or lawyer to serve as an intermediary. Be sure that whoever is serving as the organizational mouthpiece communicates openly and honestly to avoid issues down the road.
  • Formalize any amendments to the lease, and document all conversations between the parties. Do not rely on a handshake agreement.
  • As negotiations proceed, make sure to stay abreast of measures taken by city, state, and federal officials to assist commercial tenants and landlords.  There is, for instance, a bill currently pending in the New York State Senate to suspend rent for 90 days for businesses harmed by the COVID pandemic.

VIDEO: Tenant and Landlord Considerations

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Bergstein Flynn & Knowlton PLLC

At Bergstein Flynn & Knowlton, we pride ourselves on being a different kind of law firm. We are not just your attorneys, we are your partners.

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