COVID-19 White Paper for Commercial Leases
As the COVID-19 pandemic continues, the virus itself as well as the actions being taken in response to it, have directly impacted the ability of both landlords and tenants to perform their respective obligations under commercial lease agreements. STRUCTURE Cokinos, the transactional team of Cokinos | Young (principal office in Houston, Texas), under the leadership of Tiffany Melchers, represents both landlords and tenants in a number of commercial lease transactions and is aware of the issues and questions created by the COVID-19 pandemic. Each landlord and tenant should carefully review the terms and provisions of their own lease documents with a focused attention on the issues and provisions discussed below as the specific terms of commercial lease agreements will vary greatly from one lease to the next.
Abatement of Rent.
Some commercial leases contain rent abatement provisions which provide for the relief of rental payments from tenant’s obligations for certain periods of time in the event the tenant cannot access or fully utilize the leased premises. Such provisions are typically limited in scope and apply only if the landlord fails to provide the services and/or utilities in accordance with the lease documents. If the leased premises have remained open and fully operational throughout the COVID-19 pandemic, it will be difficult for a tenant to argue for rent abatement. However, if a landlord has closed its building, either voluntarily or pursuant to a government order, a tenant may have grounds to argue for rent abatement. With that said, careful review of the specific provisions of the commercial lease is necessary as rent abatement clauses typically only apply when caused by the landlord’s negligence or willful misconduct. Further, such provisions may contain additional exclusions such as events of force majeure or third-party failures outside of the control of landlord.
Force Majeure.
Force majeure is generally defined as an unforeseeable circumstance or “act of God” which prevents the fulfillment of a contractual obligation. The term has been used for many years and historically embodied the idea that a party is relieved from performing a contractual obligation when such performance was made impossible by causes beyond the party’s control. In commercial leases, events of force majeure often include an explicit list of events such as labor disputes, natural disasters, government action, war, and other causes beyond the reasonable control of the party obligated to perform. In reviewing the terms of the force majeure provision in a commercial lease, both landlords and tenants should consider the following:
- Courts rely almost exclusively on the commercial lease’s definition of the term to contemplate its applicability. Generally, a party to the commercial lease will only be excused from performance if the specific language of the provision includes the type of event that prohibits such party’s performance. Whether the COVID-19 pandemic constitutes a force majeure is largely determined by the definition in the clause itself.
- Ordinarily under the express terms of the force majeure clause in a commercial lease, the tenant is not relieved of its rent payment obligations. In other words, a tenant may be obligated to continue paying rent even with restricted access to the leased premises.
- Although a tenant’s rent payment obligations may not be relieved, a force majeure clause may suspend other obligations under the lease such as a tenant’s obligation to continuously occupy and/or conduct business operations on the leased premises or certain performance dates and timelines for improvements under the lease.
Casualty.
Casualty provisions in a commercial lease address the rights and obligations of both landlord and tenant in the event all, or a portion, of the leased premises are damaged or destroyed during the lease term. Such provisions may provide for the termination of certain rights and/or rent abatement in the event of damage or destruction to the leased premises. However, most casualty provisions are triggered only in the event of actual physical damage arising from a casualty. As such, tenants will likely not find relief under the casualty provisions as a result of the COVID-19 pandemic.
Condemnation.
Condemnation provisions in a commercial lease address the rights and obligations of both landlord and tenant in the event the leased premises are condemned by the government. Similar to casualty provisions, condemnation provisions typically require physical damage to the leased premises to trigger the provision. However, it is possible that the language in the lease is broad enough to potentially allow the tenant to argue that the COVID-19 pandemic qualifies as a condemnation if the tenant is prohibited from occupying the leased premises due to a governmental order. With that said, because of the unique circumstances resulting from the COVID-19 pandemic, it is unclear whether a court would conclude that certain governmental orders or a “stay in place” directive constitute a “taking” triggering the condemnation clause in a commercial lease.
Business Interruption Insurance.
A commercial property policy covers a business’s insured premises and property. A component of that policy is business interruption coverage that insures against losses due to the shutdown or restriction of the business’s operations caused by direct physical loss of or damage to property that is otherwise covered under the policy. Whether a shutdown in operations due to the COVID-19 pandemic causes physical damage or loss to property within the meaning of the policy is likely to be a primary issue raised by insurers in response to claims. While some of these policies may expressly exclude pandemics, some policies may include coverage for civil authority, that is, where a business is affected by an order of governmental authority, such as a “stay in place” directive that forces the closure of the leased premises. Landlords and tenants should carefully review their insurance policies and consider making a claim with respect to their business interruption insurance in connection with interruption of operations related to the COVID-19 pandemic. Every claim will need to be evaluated closely in light of the specific policy language as there is considerable variation among policies, and there is no standard policy form.
The information provided herein is not intended to fully address all issues that may arise in connection with commercial leases and the COVID-19 pandemic. As the world continues to adjust to the effects of the COVID-19 pandemic, both landlords and tenants should regularly review their commercial leases and other related documents and not hesitate to reach out to Cokinos | Young with any questions or concerns.
Alec C. Herzog