Over the last two weeks, here in the US, much of the public and private conversation has been about the novel Coronavirus, also dubbed Covid-19. While much of my concern is over the health and safety of my friends and family as well as the public at large, after five decades in commercial real estate, I can’t help but consider the economic impact that this new virus will having on commerce, our economy and, in particular, commercial real estate.
IN THIS ARTICLE I ASK AND TRY TO ANSWER THE QUESTION:
“CAN A TENANT STOP PAYING RENT DUE TO THE ECONOMIC IMPACT OF THE CORONAVIRUS?”
The short answer is, “of course”. A tenant can stop paying rent for any reason, good or bad. The better question is:
WILL A TENANT BE HELD LIABLE IF THE TENANT STOPS PAYING RENTS DUE TO THE ECONOMIC IMPACT OF THE CORONAVIRUS?”
True to my calling as an attorney, the short answer is a resounding, “maybe” or “it depends”.
This article is intended to generate discussion of the topic. I raise more questions then I answer and hope to address many of the unanswered questions in later articles and podcasts. I would like to add that I originally wrote this article on March 15, 2020, but by the time I was ready to publish this, circumstances have changed. As a result, I have modified this to take into consideration recent governmental ordered closures.
This article is written from the context of a commercial real estate lease, but many of the questions and legal concepts considered are applicable to other types of commerce.
APPLICATION OF FORCE MAJEURE
Many, if not most commercial leases contain a “Force Majeure” provision which, in essence provides that one or both of the party’s obligations may be suspended or terminated as a result of circumstances not within their control.
Typical wording includes:
“strikes, lockouts, actions of the elements such as earthquakes, floods, accidents, rules and regulations of any federal, state, municipal or other governmental agency, or because of other matters or conditions beyond a party’s control”.
I have generally read these provisions or they have been written in a way that relieves the landlord from liability if the landlord could not give the tenant full use of the rented premises as a result of a flood, fire, or earthquake, etc. Frankly, until the last two weeks, I never considered the application of Force Majeure to suspend or excuse the tenant’s obligations in the event of an epidemic. In this article, I consider the situation in which the Coronavirus may, so seriously, diminish a tenant’s revenue so that they can no longer afford to pay the full rental obligations.
Even if you subscribe to the belief that the public or media is overreacting to the Coronavirus the public reaction, being reasonable or not, is real. This statement reminds me of an axiom of contract law taught in law school and often attributed to Sir Edward Fry, an English judge in the late 19th Century,
“the state of a man’s mind is as much a fact as the state of his digestion”
In today’s parlance this means that if the public believes that they will catch the Coronavirus by eating at a restaurant, they will not go out to eat. It then, logically follows, that if people stop going out to eat, restaurant revenues will decline, perhaps enough so that many restaurants may fail and/or no longer be able to pay their rents.
IS ECONOMIC DISTRESS ENOUGH?
Let’s now consider what kind of relief a Force Majeure provision may provide to restaurant and other tenants who are and will likely feel the considerable economic pinch of this virus. Using the restaurant example, I discuss four different circumstances; (1) closures due to economic conditions, (2) government recommended closures, (3) government ordered closures, and (4) government ordered, partial or modified closures.
First, a review of the tenant’s lease is necessary. The applicable provision need not use the words, “Force Majeure” but will require words that have the same effect, excusing or suspending performance for circumstances out of the party’s control.
In preparation of this article, I reviewed several leases that I have been involved in over the years. I was surprised to discover how many of them excused performance, except for the tenant’s obligation to pay rent. This rental exclusion may be more as a result of the fact that I have represented more landlords then tenants, but it does raise the issue of negotiating the Force Majeure language in the first place, an issue that I am not going to fully address in this article. For the purpose of this article, though, I will assume that the language will protect both parties without a rental exclusion. Consider the following example:
“Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God; inability to obtain labor, materials or reasonable substitutes therefor; governmental restrictions, regulations, or controls, judicial orders, enemy or hostile governmental action, civil commotion, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, shall excuse the performance by such party for a period equal to that resulting from such prevention, delay or stoppage”
I must admit that when I started writing this article, I assumed that I would conclude that the virus was an act of God and would “clearly” provide some relief to an effected tenant. However, after considering the language and thinking about a number of differing circumstances, I am no longer so sure.
I think it is fair to consider the virus to be an act of God. In some cases, the supply chain may be so interrupted that a retail tenant may not have access to goods to sell in which case my example might be applicable. There may be other tenants whose employees cannot travel to work and where telecommuting is not a reasonable option so that access to labor becomes problematic.
However, and keeping in mind my sample language, I think it is fair to question whether the disruption in business is as a result of the virus or the tenant’s reaction to the virus. What is meant by and how do we apply “beyond the reasonable control of the party obligated to perform”?
WHAT IF THE GOVERNMENT ORDERS A FULL OR PARTIAL SHUTDOWN?
Perhaps the most extreme and clearest example of the application of the Force Majeure provision is when a governmental agency orders the complete closure of a type of business such as gym or bar establishments. The “governmental restrictions” language would likely apply. Less clear would be instances in which a governmental entity has ordered a partial shutdown or restriction as in the case of restaurants being restricted to curbside service. The restaurant would be able to continue to operate, albeit on a limited basis. The example language isn’t clear that a partial “prevention, delay or stoppage” would trigger the provision. What happens if curbside service is not adequate to sustain a profitable restaurant business and the restaurantor decides to temporarily close to minimize losses? Is the closure as a result of an act of God, governmental action or the volitional and intentional act of the tenant?
Consider the cruise industry that is cancelling cruises, system wide. Assume that a cruise line has a license to use a dock and terminal during scheduled trips. They likely rent warehouse and office space in or near each of the ports that they dock at. Might they seek the temporary forgiveness of rents at the docks, terminals and warehouses during the cessation of cruises? Is their system wide cancellation of all cruises, due to the virus or is the decision to cancel a cost saving decision in the sole discretion of the cruise line? Isn’t that decision within the reasonable control of the cruise line? Did they cancel because it was less expensive to cancel than to proceed with the cruises, half empty? The circumstances posed by these questions are different from a situation in which a governmental entity ordered them to stop all cruises.
Assume, for the moment that the virus is considered an act of God, how direct must that act of God be to the tenant seeking Force Majeure relief? Las Vegas, a city heavily dependent upon tourism, hospitality and the convention business is being particularly affected by the Coronavirus outbreak. Conventions attracting upwards of 90,000 people are being cancelled. Cancellation of these conventions is likely to cause a domino effect on the companies that are dependent on convention business. Can these convention dependent companies such as those that construct and tear down the booths rely on Force Majeure language to avoid paying rent to their own landlords?
I really can’t answer, with a reasonable degree of comfort, most of the questions that I ask in this article. It’s just too early to tell at this stage. In a commercial context, Force Majeure provisions may, and I emphasize, may, provide some rental relief to commercial tenants affected by the Coronavirus. However, the devil is in the details. A Force Majeure clause like the example I’ve used above is too vague for my comfort. What I can say is that I and most other knowledgeable attorneys, landlords and tenants are going to be paying considerably more time and attention to the this often overlooked, “standard” provision in their lease negotiations.
If you are a tenant who is being significantly impacted by this virus, I recommend that you have a competent lawyer, experienced with commercial leases, review your lease in the context of applicable state law where the premises are located.
Finally, and certainly not the least important consideration, review your business insurance policy to see if you have some sort of insurance coverage.
ABOUT THE AUTHOR:
Howard F. Kline, Esq. | LinkedIn
Howard has been focusing much of his 43 year, legal career on landlord tenant relations, whether negotiating leases or litigating disputes. Howard is the founder and host of CRE Radio & TV and has published hundreds of blog posts and podcasts on a wide array of commercial real estate topics. Howard has been published in numerous legal periodicals, including the National Law Journal, LA Daily Journal and other business.