As the United States continues to tackle the adverse economic effects of COVID-19, corporate tenants have started asking how this may affect their leases.
The challenges caused by the pandemic and the introduction of COVID-19 protocols imposed by the Government have already limited business operations across the world. Therefore, corporate tenants in all sectors must understand the implications for their leases and tenant rights.
Force Majeure
Social distancing protocols require that there should be a limit to the number of people who can be at a gathering. Besides, there are stay-in-place orders as well as mandatory closures of nonessential businesses across the United States due to COVID-19. Indeed, COVID-19 has significantly impacted the day-to-day business operations of corporate tenants, with some opting to completely shut down their operations indefinitely. Tenants are defaulting on their rents, and there are concerns about whether clauses like force majeure can be implemented.
Force majeure is a clause included in leases to remove liability for natural and unavoidable catastrophes. If there is a force majeure clause in the lease, courts apply a narrow interpretation of the clause, seeking whether the purpose of the lease is frustrated by the occurrence of the force majeure event.
Another point to consider is whether the force majeure clause clearly states that the lease may be excused or delayed where the obligation conflicts with federal, state, or local laws, regulations, or ordinances. This is important because it is a critical factor that determines whether a landlord will honor the tenant’s request for non-performance of their obligations under the lease since most states have issued ordinances and proclamations declaring mandatory closures of commercial buildings and businesses due to COVID-19.
Practical Steps
As many corporate tenants are seeking rental relief from their landlords due to COVID-19, here are some practical steps that corporate tenants can take.:
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Check your documents. This means that you have to check all lease agreements for force majeure, default, business-interruption insurance policies; rent abatement and notice clauses; and loan documents, where applicable.
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Put it in writing. As you have an agreement with your landlord, it is important to memorialize the agreements in writing. This is to avoid any legal actions that negate all negotiations on how to mitigate the effects of COVID-19 on the contractual obligations.
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Be flexible. There are numerous creative solutions available that may benefit both the landlord and tenant during this pandemic. Hence, it is essential to look for creative ways that can help in preserving your business relationship with the landlord while maintaining financial stability.
As a corporate tenant, it is important to understand your legal obligations and commitments. This implies that you have to act responsibly and not assume that you are or will be automatically released from your legal obligations under a lease because of COVID-19.
Nevertheless, regardless of the legal framework, it is in the best interest of the landlord that there is a mutually beneficial approach to withstand the continued financial and operational difficulties caused by the COVID-19 outbreak.
Wondering where to begin?
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