Most commercial landlords use their own form of a lease agreement. They will simply modify that existing form to be consistent with the terms that they’ve reached with a new tenant. From time to time, they’ll revisit the provisions in that form, but typically, any changes are minor and are precipitated by some glaring issue. In the wake of COVID-19, commercial landlords and their tenants are actively modifying existing lease agreements. Many commercial landlords are working with their tenants to formulate plans to enable the tenant to avoid insolvency while ensuring that the landlord receives rent and other charges due under the lease. Given the unknown duration of the current crisis, commercial landlords may want to address the following provisions in their lease agreements in an effort to avoid litigation or to position themselves as best as possible should COVID-19 related litigation arise:
The notion that the majority of commercial tenants in the United States could seek governmental assistance to pay their rental obligations would have seemed far-fetched just a few months ago. Post-pandemic, several such governmental assistance programs are available to tenants, and discussion about continuing assistance is ongoing. Commercial landlords should consider the addition of lease provisions, which reflect that tenants must apply for such assistance, if eligible. Further, if the tenant receives any governmental assistance which can be applied towards rent, the tenant shall actually use such assistance to pay rent, promptly repay landlord any abated rent, or accelerate repayment of any deferred rent. These provisions could go so far as to say that the tenant shall endorse any checks, make any bank transfers, and take any other reasonable steps to transfer such government assistance funds to the landlord in order to meet the tenant’s payment obligations. Additionally, these provisions could reflect that the tenant should be required to cooperate with the landlord to enable the procurement of any governmental assistance that may be available to the landlord, including providing necessary financial documents.
Force Majeure/Unavoidable Delay
Following the COVID-19 outbreak, tenants have attempted to use the common law doctrines of the frustration of purpose, impossibility, and/or impracticability to defer or abate the rent. It is important to note that, in most states, these arguments are uphill battles for tenants and often require evidence that this event was unforeseeable to all parties or that the purpose of the lease was entirely frustrated.
When able, tenants also cite to force majeure provisions within the lease. These provisions typically enumerate the unusual events foreseeable by the parties and the effect of those events on the obligations of the parties. Interestingly, many commercial leases are not as clear as they could be on this issue. From a commercial landlord’s perspective, if a lease contains a force majeure provision, it should be clear in that provision that force majeure events shall not excuse the obligation of the tenant to timely pay rent or other charges required by the terms of the lease. Landlords may also want to consider including the words “without offset” in other portions of the lease which deal with the tenant’s obligations to pay rent and other lease charges.
Use and Continuous Operation
Given the real possibility of periodic government-mandated restrictions over the next couple of years, landlords should consider proactively modifying lease provisions regarding the use and continuous operation. For example, restaurant leases could require the tenant to operate its kitchen, carry-out, and delivery business even if its dining room is closed. For those tenants that are required to entirely cease operations, the lease could specify that they are required to reopen within a certain number of days or hours after they are legally permitted to do so. Thought should also be given to broadening the scope of the tenant’s permitted use of premises, provided that such use is lawful and does not interfere with any exclusivity agreements that the landlord has with its other tenants. As an example, if a tenant were to consolidate multiple locations, it could be to a landlord’s benefit to have lease language which allows a larger portion of a warehouse to be used for office space.
When negotiating lease provisions, many commercial tenants insist that they must actually receive notices sent to them before their obligation to take any action (i.e., cure a lease default) is triggered. Even pre-pandemic, these notice clauses presented logistical challenges. These provisions have become even more problematic now that many businesses are operating irregularly. Does marking “COVID-19” in the space where the recipient was supposed to sign for an overnight mail package count as receipt? There are at least a couple of options for landlords. A landlord could insist that notice be effective upon the earlier of actual receipt or within a certain number of days (usually 1-3) following the depositing of the notice with either the postal service or a reputable overnight courier. This alleviates any concerns as to whether the tenant truly received notice. Similarly, a landlord could consider agreeing to the use of e-mail as a valid notice method for purposes of giving notice to a tenant.
As the implications of COVID-19 continue to evolve, the above list is by no means intended to be a comprehensive one. And, landlords and tenants should certainly consult with legal counsel prior to making any changes to leases.
ABOUT KEITH B. NICHOLS
Keith Nichols is a litigator focused on business, commercial, and real estate matters. His clients include a variety of business entities including financial institutions, developers, commercial brokers and property managers, homeowners’ associations, retailers, municipalities, and schools.
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