Commercial Lease Obligations During The Coronavirus Insanity
As you may be aware, Governor Sisolak declared Emergency Directive 008 (the “Directive”) earlier this week. The Directive essentially puts a stay (prohibition) on all commercial and residential evictions and foreclosures while the state of emergency (issued March 12, 2020) remains in effect. Basically, this means your landlords cannot evict you from your space for defaulting on your leases, including not paying rent, during the time the Directive is in place. While I do believe the intent of the Directive is benevolent as it aims to keep businesses in their commercial spaces and individuals in their homes during this time, the language of the Directive creates concerns for businesses (and individuals) once it is lifted. For example, the Directive in no way relieves either party from any of its contractual obligations under a lease (or applicable agreement), including the payment of rent. The only suggested remedy under the Directive, once it is terminated, is the “encouragement” of the parties to negotiate payment plans or other agreements to cure defaults or missed payments that may have occurred during the time the Directive was in place. Encouragement is a far cry from a requirement, which may end up being a very real problem if landlords simply demand all amounts in arrears be paid immediately upon the termination of the Directive. If tenants cannot pay, landlords would then theoretically have the right to evict their tenants. That is not to say that will infallibly be the case, but it is certainly a concern.
As a result, we think it is a good idea to: 1) check with your insurance providers to see if you maintain business interruption coverage, and, if so, make a claim ASAP; and 2) reach out to your landlords now to see what alternative arrangements may be made in relation to the payment of rent during all of this craziness. It is our understanding that portions of the new stimulus packages afford at least some relief to landlords and lenders which they may be able to pass onto their tenants.
Over the past two weeks, we’ve received an influx of calls from folks asking whether force majeure clauses in their commercial leases permit them to suspend rental payments to their landlords because of the coronavirus insanity.
The short answer is, it depends, but probably not.
Generally speaking, force majeure clauses relieve parties to an agreement from performing their obligations where an event beyond their control occurs which would make performance impracticable, illegal, or impossible. You may see these provisions referred to as “Acts of God,” “Excuse for Non-Performance,” or something to that effect. The issue here is that most commercial lease agreements specifically exclude the payment of rent by a tenant from the relief available under the force majeure provisions. For example, if your lease has a force majeure provision, it may include something similar to:
“With the exception of the obligation of Tenant to pay Rent and all other amounts that may be due from time to time under this Lease…”
“…provided, however, that nothing contained herein shall excuse Tenant from the prompt payment of any rent or charge required of Tenant hereunder.”
“…except that the foregoing shall in no way affect or apply to (i) Tenant’s obligation to pay Rent or any other sums or amounts hereunder…”
“The provisions of this Section shall not be applicable at all to excuse or permit delay of the time for Tenant (a) to pay Rent or other money…”
Ok, ok, you get the point. If your lease contains similar language, it means that your obligations to pay rent, and other amounts due, are not abated or suspended during the force majeure event. So, in a nutshell, although the ramifications of the Coronavirus are almost certainly an event that would excuse performance otherwise, your lease agreement may require that you still pay rent. Please refer to your specific lease agreement to check what your force majeure clause, if any, says about rental obligations.
You may be scratching your head thinking, why is this the case? It seems super unfair! Well, look at the situation from the landlord’s perspective. They are also a business, and a lot of times, a small business like yours. They are ultimately responsible for the expenses related to the space you occupy, including mortgage payments to their lenders, insurance, utilities, taxes, etc. For that reason, it has been our experience that landlords aren’t too keen on removing this type of language, but as a practical matter, force majeure events are fairly rare and infrequent. That said, when negotiating leases, it usually didn’t make much sense to try to remove the rental exclusions from such provisions. That was, of course, before the whole damn world was shut down and locked up! Unfortunately, this whole situation is unexpected and unprecedented, which is creating a pretty vicious cycle for small businesses. Moving forward, looking toward lease renewal or when executing a new lease agreement, it may be worth scrutinizing the force majeure provisions a little more.
Now, before you break out the pitchforks and torches here, please understand that the vast majority of our real estate clients are tenants. However, it is important to realize that this pandemic is affecting everyone in the business community, including landlords. That said, whether or not your lease has a force majeure provision, and if so, it includes similar language to that above, I would suggest reaching out to your landlord to see what creative alternative arrangements may be made. Your landlord may be nice enough to contact their banker or lender to see if they can obtain any relief from their obligations so they can offer relief to you.
As always, if you have any specific questions regarding your lease agreement, please feel free to reach out to us. Hang in there, everybody! We’ll get through this hot mess!