July 6, 2020 | by Deborah S. Cochran, Senior Associate
The COVID-19 pandemic has impacted business operations in all 50 states and U.S. territories across a variety of industries. One of the most significantly affected areas of operation is the on-site workforce. Businesses have been forced to close their doors due to state and local shelter-in-place orders, many of them needing to quickly make arrangements for employees to work from home where possible. Most businesses closing their doors to the public will see a dramatic and unprecedented reduction in revenue, even if their closure is temporary. What does that mean for commercial tenants with a lease payment due? Wong Fleming has provided the following suggestions:
- Review Your Lease Agreement. Review your lease agreement to determine whether a Force Majeure clause is applicable. Most commercial leases that include a Force Majeure clause specifically eliminate payment of rent as an excused obligation by a tenant. Keep in mind that any applicable Force Majeure clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the Force Majeure event. If your lease does not have a Force Majeure clause, you may still seek certain relief under state common law doctrines such as “impracticability,” or “frustration of purpose.” Please keep in mind, however, that many courts have traditionally ruled that the payment of money does not qualify for the use of these common law doctrines. These doctrines may apply if the actual performance of obligations under the lease is impractical due to hardships to one of the parties or performance is no longer of any benefit to a party. Given the unprecedented nature of the COVID-19 pandemic, most states have little guiding precedent in place, but courts may offer relief to tenants affected by COVID-19 under these doctrines in the future.
- Review the Status of Finances. Review business finances and prepare a financial forecast assuming the financial repercussions of the COVID-19 pandemic will last through the end of 2020 or longer. Determine whether the business has savings and where certain immediate financial cuts can be made. Looking ahead will help you determine the best way to approach your landlord.
- Speak With Your Landlord. Communicate with your landlord before defaulting on the lease, as a default may eliminate other enumerated benefits such as the option to extend the lease or even early termination. To avoid default, ask your landlord to consider granting certain concessions to aid your business in recovering from the impact of COVID-19. Such concessions may include: 1) permitting a temporary rent reduction; 2) temporary abatement or deferral in paying rent; 3) applying the security deposit to rent payments with a proposal for later replenishment thereof; or 4) early termination. Some landlords may not consider relief until a default has occurred, so weigh the benefits of potential relief against that of any elections you may lose as a result of defaulting.
- Eviction Moratoria. Many states and local municipalities have implemented an eviction moratorium which prevents landlords from evicting commercial tenants when they have defaulted as a result of financial distress caused by the COVID-19 pandemic. Most orders specifically apply to nonpayment eviction notices, no-fault eviction notices, and unlawful detainer actions. The orders do not relieve tenants of their liability for unpaid rent, however, the more progressive municipalities provide directions for how long a tenant may pay back outstanding rent and what documents must be produced to obtain temporary relief. Many eviction moratoria are set to expire, at which time landlords can take immediate action to eject tenants, in most cases.
- Review Your Business Interruption Insurance and Submit a Claim. Most commercial leases require that tenants obtain business interruption insurance as a condition of leasing a property. This type of insurance can serve as a replacement for tenant income and cover tenant operating expenses resulting from business being halted in the leased premises for a reason covered by the policy. Many landlords require tenants to have this type of insurance because it allows tenants to continue making necessary rental payments. Contact your insurance carrier to submit a claim. The scope of the business interruption insurance coverage will vary, but typically it will cover the loss of income during a “qualified business interruption” such as a natural disaster or government action which impacts the income of the insured party.
- Apply for All State and Federal Business Aid. Apply for any available state and federal loans or grants available to businesses suffering as a result of the COVID-19 pandemic. It may require multiple application attempts, as many of the government systems are inundated with applicants.
Conclusion: You must be proactive in reviewing your lease agreement, knowing your business’ financial conditions, and contacting your landlord to obtain relief. Being proactive will allow you to enter into negotiations with a clear idea of exactly what relief you need and show that you are making a good faith effort to resolve any potential breach of the lease.
About Deborah S. Cochran
Deborah S. Cochran is a Senior Associate in the firm’s San Diego, California office. Ms. Cochran has experience in civil litigation, employment law, trademark, bankruptcy, debt collection, and transactional law. Ms. Cochran has represented several of the “Big Five” National Banks in wrongful foreclosure matters and has litigated a variety of matters relating to real property and commercial contracts.