Steps Landlords and Property Owners Can Take to Respond to Challenges of COVID-19
As we know, the COVID-19 Virus is confronting the commercial real estate community with difficult and unique challenges. Tenants are requesting rent abatement due to lost business and property owners may soon have a hard time covering debt service. Here are some suggestions for landlords and property owners:
- Force Majeure Clauses. The term means "superior strength" in French. Landlords should review the Force Majeure clauses in their leases. In the absence of a governmental directive, the typical Force Majeure clause in a commercial lease excludes a tenant’s lack of funds or inability to pay from the scope of Force Majeure. Well drafted (from a landlord’s perspective) Force Majeure clauses will generally preclude tenants from abating rent because of lost business. As this virus spreads, the risks and loss to landlords from poorly drafted Force Majeure clauses is obvious.
- For new leases, landlords should ensure the Force Majeure clause contains language such as “Force Majeure shall not include any lack of funds or any other financial inability to perform any obligation hereunder.” If you are amending a lease for any reason, use that as an opportunity to plug this hole in a weak Force Majeure clause.
- However, if a tenant is denied access to its leased premises by reason of a governmental directive, such as shelter in place, then, regardless of the tenant’s financial situation, the typical Force Majeure clause would excuse payment of rent for the duration of the directive.
- Looking forward, we anticipate that it may become common for landlords to attempt to exclude from the scope of Force Majeure “harm arising directly or indirectly out of the spread of pathogens, biological materials, viruses or other microbes” to preclude a tenant’s assertion that a pandemic is an “Act of God” which is often a specific subset of Force Majeure. In the aftermath of the SARS epidemic insurance companies typically excluded loss resulting from pathogens, etc. from Business Interruption Polices meaning losses from this virus are likely excluded from these policies.
- Casualty and Condemnation Clauses. These should be reviewed as well. The typical casualty clause in a lease excuses rent only if the leased premises is physically damaged or rendered inaccessible. A ‘shelter in place’ directive which renders leased premises legally inaccessible arguably excuses a tenant from paying rent. This issue will undoubtedly be litigated. A governmental taking or seizing of private property for a public purpose, such as a temporary taking of a warehouse for conversion to a hospital, would result in rent abatement.
- Property Owners/Mortgagees. Property owners should contact their lenders or servicers now - before a rent shortfall leads to a mortgage default. Many financial institutions are considering making existing loans interest-only and deferring required principal payments for a period of months. Property owners should commence these discussions now before the wave hits the banks and while the bankers are still at work.
- Evictions and Foreclosures. On Tuesday, March 17th, Judge James W. Abrams issued an order that immediately stayed all issued eviction executions and ejectments through March 27, 2020 in Connecticut. All foreclosure sales scheduled for this Saturday (3/21) and next Saturday (3/28) will be pushed off into mid-May. There are 58 sales scheduled on each date statewide.
We will continue to provide updates to help our clients navigate these uncertain times. Questions on any of the above may be directed to Pullman & Comley’s Real Estate attorneys.