Coronavirus: Key Issues For Commercial Leases
The outbreak of the novel coronavirus (COVID-19) and the measures being taken in response have raised many questions about the effect on commercial leases.
The rapid spread of the virus and increasing scale of governmental response raise implications for the ability of landlords and tenants under office, retail and industrial leases to perform their respective obligations. In light of this rapidly evolving situation, commercial landlords and tenants should assess and understand their rights and obligations under their lease documents, including circumstances under which a party may potentially be excused from its obligations due to COVID-19.
In recent weeks, various state and local governments have taken drastic actions to curb the spread of COVID-19, including issuing stay at home orders and closures of non-essential businesses.
To the extent that the effects of COVID-19 and actions taken in response to it prevent tenants under commercial leases and their personnel from accessing and using their space for the operation of business, and/or landlords from running their buildings and providing required services to tenants, questions will arise concerning the obligations of the parties and relief which may be available. As the answer in each case will largely depend upon the specific provisions of each lease, landlords and tenants should review their leases with a particular eye toward the following issues and provisions.
Force majeure clauses are contractual provisions that excuse parties from performing their contractual obligations when certain events or circumstances beyond their control prevent such performance. In commercial leases, these clauses may include events such as strikes, labor disputes, natural disasters, acts of God, inability to obtain materials, governmental actions, war, civil commotions, fire or other casualty, and possibly a catch-all such as “other causes beyond the reasonable control of the party obligated to perform.” Parties should consider the following in analyzing force majeure provisions:
- Force majeure clauses very narrowly and ordinarily a party will only be excused from performance if a force majeure clause specifically includes the event that precludes a party’s performance.
- Force majeure clauses in commercial leases often expressly exclude and do not relieve a tenant of the obligation to timely pay rent. Thus, a tenant could find itself in a situation of having to pay rent even if it is unable to access or conduct business in its premises.
- Even if a lease does not specifically include a pandemic or outbreak of communicable disease as a force majeure event, it is possible that the COVID-19 outbreak or its effects could be the basis of a force majeure claim. Such claim will be more immediate in the face of a government order that prevents a tenant from accessing and operating in its premises, or a landlord from providing services required under the lease. While such a condition may not necessarily relieve a tenant of its obligation to pay rent as noted above, it may relieve the tenant of an obligation under the lease to continuously occupy and/or operate in the premises.
- If a lease does not have a force majeure clause, there is no general right to force majeure relief under the law. Instead, parties may potentially look to common law doctrines of “impossibility” and “frustration of purpose,” which are recognized in most jurisdictions. Although beyond the scope of this alert, these doctrines are much more limited in scope than force majeure and often require a much higher standard to be met in order to be invoked.
Some commercial leases may contain provisions (which may be separate from a force majeure clause) under which a tenant may be entitled to abatement of rent in the event it cannot access or use the premises for a period of time due to the landlord’s failure to provide services or utilities required under the lease. These clauses are often limited to situations caused by the landlord’s negligence or willful misconduct and contain exclusions for force majeure events or the failure of third parties (e.g., failure of the utility company to supply power to the building) outside of the landlord’s control.
As noted above, certain tenants (particularly in the retail sector) may have obligations under their lease to continuously operate their business in their premises during certain hours and days, and/or to operate fully-staffed. As the COVID-19 outbreak and any government-ordered closures will likely bear on a tenant’s ability to meet this obligation, it will be in the interest of tenants to communicate with landlords regarding any closures of the tenant’s premises prompted by these events.
This is not intended to be exhaustive or include all issues that may arise or need to be considered in connection with commercial leases. The issue of what insurance coverage(s) may be available to the parties to cover a tenant’s inability to make rent payments as a result of the COVID-19 outbreak is beyond the scope of this alert and should also be analyzed. Should you have questions about your particular lease situation, please contact us.
Disclaimer: While this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop over time. Accordingly, caution should be taken before relying upon this article, and you should verify that the law described herein has not changed.
This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
We Are Here to Help
Our commercial property and financial restructuring practice has been advising clients on these developing issues since the outbreak of COVID-19. Wright Law Firm has significant experience with transactions between commercial landlords and tenants in Arizona. We can review your case and lease agreement. Contact us today to schedule an initial consultation or make an appointment online.