Commercial Leases in Light of COVID-19

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While the COVID-19 pandemic has created headwinds for the commercial real estate market, straining both landlords and tenants, commercial leasing activity persists. New buildings continue to open, landlords who lost occupancy due to the pandemic are seeking new tenants, and in many cases, landlords and tenants are renegotiating leases.

The pandemic has underscored the need for careful contracting, particularly when entering a commercial lease. Many tenants have found they are required to continue paying rent despite government action forcing their businesses to close. Many landlords, meanwhile, have lost revenue as tenants argue that their leases excuse them from making rental payments due to the pandemic.

Whether renegotiating or entering a new lease altogether, there are several contractual provisions commercial landlords and tenants should consider in light of the COVID-19 pandemic. 

Force Majeure

A “force majeure” provision may suspend a party’s duty to perform upon the occurrence of an unforeseeable event outside the parties’ control, and which prevents performance by the party. Like with any contractual provision, the precise wording of a force majeure clause is critical. Some provide limited and specific occurrences that qualify under the force majeure provision, while others may be more open-ended.

Force majeure clauses typically cover acts such as extreme weather events, strikes, and terrorist attacks, and many drafted before COVID-19 did not expressly cover pandemics or viral outbreaks, or governmental shutdowns due to pandemics.  Additionally, some force majeure clauses may allow for delayed performance while the event is ongoing. Others may excuse performance altogether, although excuse of performance is not usual.

It is important to remember that courts interpret force majeure clauses narrowly, meaning they only cover the specific events named in the clause, though some include catch-all provisions that provide broader protection.

Moving forward, commercial landlords and tenants should work with an attorney to ensure they negotiate a force majeure clause that protects their rights and interests in case of an extraordinary event, including additional outbreaks or complications from the current COVID-19 pandemic.

Business Interruption Insurance

When entering into or renegotiating a commercial lease, landlords and tenants should consider whether the lease should require either or both parties to carry business interruption insurance. Business interruption insurance generally covers financial loss, including missed rental payments, due to a covered event such as fire, extreme weather, or other significant property damage.

Two important questions face landlords and tenants regarding business interruption insurance:

  1. Does the business interruption policy cover losses created by the pandemic? Many policies require physical damage, and thus would not cover pandemic-related losses. Landlords and tenants should engage an attorney to review their policy to ensure it covers losses potentially suffered as a result of COVID-19 or other infectious disease outbreaks.
  2. Who should pay for the business interruption insurance? Some landlords may carry business interruption insurance, others may require tenants to carry such insurance, and some commercial leases may split the costs between landlord and tenant. To ensure a business interruption policy provides adequate protection against losses created by the pandemic, landlords and tenants should consult with their attorney.

Interruption in Services

Commercial landlords and tenants should also consider how an interruption in services provision could allocate risk during a pandemic. Generally, an interruption in services clause abates a tenant’s duty to pay rent if the landlord has failed to provide an essential service (e.g. water or electricity) or if the property is deemed untenantable. While interruption in services clauses are often limited to situations caused by the landlord’s actions or negligence, a broadly drafted interruption in service clause could impose significant risk on a landlord. For example, if a local ordinance closes restaurants, a broadly drafted interruption in services provision could relieve a restaurant tenant of the duty to pay rent.

Responsibilities for Common Areas

The outbreak of COVID-19 has underscored the health and safety challenges posed by common areas such as elevators, lobbies, and cafeterias. When renegotiating or entering into a new lease, landlords and tenants should consider how the responsibility for keeping common areas clean and safe is allocated.

Tenants may seek to include provisions requiring the landlord to perform sanitizing services. Landlords, meanwhile, may wish to include provisions requiring tenants — particularly in multi-tenant buildings — to adhere to safety protocols such as temperature screenings, avoiding crowded elevators, and wearing masks in common areas.  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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