COVID-19 Related Legal Issues Impacting Commercial Leases
Burke, Warren, MacKay & Serritella, P.C. is providing guidance to clients (both landlords and tenants) with respect to a variety of COVID-19 related issues impacting their commercial leases. The large volume of leasing work done by our firm has helped us quickly develop institutional knowledge of the unique issues presented by the pandemic. That said, one of the most important lessons gleaned from recent experience is that these analyses are quite fact specific, depending upon, among other things, the type of property and business and a variety of other variables. There are, however, some global observations to offer:
- While most commercial leases include “force majeure” provisions which excuse performance based on factors outside of the control of a party to the lease, these clauses typically do not excuse a tenant from any obligation which requires the payment of money and, in fact, many landlord prepared forms protect only the landlord and not the tenant.
- Even though a pandemic or similar event may not be specifically identified as a force majeure event, they would likely be considered to be force majeure, as this kind of event is completely unpredictable and outside the control of either party.
- A typical force majeure clause is designed to provide additional time for performance but not to permanently excuse a party from its contractual obligations.
- Some leases include provisions wherein rent will abate temporarily during periods of temporary closure necessitated by a lack of utilities or other services which the landlord may be obligated to provide. If landlords are required to, or elect to, shut down their properties and electricity, heat or other basic services are no longer provided, tenants may be excused from paying rent.
- As a landlord, it is important to continue to comply with all maintenance, repair and service obligations under the lease, to the extent possible, and to keep tenants informed of these efforts.
- Landlords should take steps to protect themselves from possible liability by establishing protocols for disinfecting common areas of their properties and strictly adhering to those protocols, and keeping tenants informed of contamination or suspected contamination, to the extent known.
- COVID-19 will also impact landlords and tenants before occupancy of the premises has even occurred. In addition to potentially increased construction costs due to the scarcity of both labor and materials, commencement date (and rent commencement) delays and penalties may come into play, depending on the specific lease provisions.
- If the landlord is performing base building work or other improvements before delivering possession to the tenant, inability to obtain permits and/or materials, as well as labor delays, may result in the landlord's failure to deliver possession by a required date. While in some leases this scenario may simply delay the commencement date (and therefore the payment of rent by the tenant), in other cases the landlord may be liable for a per diem penalty for failure to deliver, or even a termination right by the tenant. A force majeure clause, if applicable, may provide some relief if these types of penalties apply, depending on the wording.
- If delivery by the landlord has already occurred and the lease provides the tenant with a finite period of time to complete its improvements, the obligation to pay rent, and in some cases an obligation to be open for business, may commence even though the tenant is unable to complete construction and occupy the premises. Again, depending on the specific language, a force majeure clause, if included in the lease, may alleviate some of this risk.
Whether you are a landlord or a tenant, your rights and obligations under your commercial lease will be impacted by COVID-19. Please reach out to us if you would like to discuss your concerns or questions, or to receive updates.