Seyfarth Synopsis: As the COVID-19 pandemic continues to spread and affect our lives and businesses across the U.S., we are continually following the latest updates and providing insight. This Legal Update focuses on what constitutes an essential critical workforce in regards to the real estate industry, with a particular focus on issues being encountered by commercial landlords with regard to essential critical workforce amid the COVID-19 pandemic. In light of this, real estate clients are asking important questions regarding the potential legal issues COVID-19 may create concerning their rights and obligations as real estate owners and landlords in light of issued U.S. Department of Homeland Security (“DHS”) guidance and state-specific Executive Orders (“EOs”) -- specifically, as it relates to the work of maintenance personnel necessary to maintain healthy living standards in commercial buildings and habitability concerns under relevant landlord-tenant law. This client insight discusses some of the legal and business issues being faced by commercial landlords and property managers because of COVID-19 and lays out certain action items that can be executed to better assess and prepare for the short-term and long-term impacts of COVID-19.
As of March 25, 2020, there were more than 80,000 cases of COVID-19 in the U.S., with more than 500 American deaths from this highly contagious disease, and these numbers are increasing by the day. In recent weeks, state and local governments have been increasingly calling for individuals and businesses to cease operations in the ordinary course of business to help combat the spread of the COVID-19 pandemic — allowing only workers who are deemed “essential” to maintain their normal schedules. While numerous state and local governments have taken express steps to restrict daily business operations through mandated EOs, DHS, through its Cybersecurity and Infrastructure Security Agency (“CISA”), has instead provided voluntary guidance for owners, tenants, property managers, and investors in the real estate industry. The looming question, then, is which persons exactly are included within the category of “essential critical infrastructure workforce” under the CISA guidance. To provide some guidance to state and local governments, CISA has listed those industries and workers which are in that special category.
CISA’s Guidance on “Essential Critical Infrastructure Workforce”:
On March 19, 2020, Christopher C. Krebs, the Director of CISA, released a Memorandum that provided updated guidance on identifying “essential critical infrastructure workforce” during the COVID-19 response. In this Memorandum, CISA quoted the President’s March 16th updated Coronavirus Guidance for America, which stated: “[i]f you work in a critical infrastructure industry, as defined by the Department of Homeland Security, such as healthcare services and pharmaceutical and food supply, you have a special responsibility to maintain your normal work schedule,” and provided further advisory guidance for interpreting the same. As clearly indicated in the CISA Memorandum, that guidance, however, is strictly advisory and not a federal directive to states, meaning that state and local governments are not required to provide the same level of recognition to these classes of workers as they issue EOs in the face of COVID-19. As such, although this Memorandum is designed to serve as a reference, it must be viewed in conjunction with the definitions of “essential workers” and “critical infrastructures”, as defined by the states, that would be binding on businesses and individuals residing in those states.
Although CISA’s list of essential employees is strictly advisory, it is worth noting that many state and local governments are modeling their own definitions of these (or similar terms) upon this federal guidance. CISA’s updated guidance complements the Presidential Policy Directive 21 (“PPD-21”): Critical Infrastructure Security and Resilience released on February 12, 2013. Currently, there are 16 employment categories that CISA identifies as an “essential critical infrastructure workforce,” including the employees in the following subsectors: (1) health care and public health sector; (2) emergency service sector, including law enforcement; (3) food and agriculture sector; (4) energy sector; (5) water and wastewater systems sector who are needed to operate and maintain drinking water; (6) transportation systems sector, including mass transit employees and those who maintain and inspect infrastructure; (7) dams sector, including public works employees who operate, inspect and maintain dams, locks, levees, and bridges; (8) information technology sector; (9) communications sector; (10) governmental facilities sector, including elections personnel, building employees, security staff, trade officials, weather forecasters, customs employees, and educators; (11) critical manufacturing sector necessary for the manufacturing of materials and products needed; (12) nuclear reactors, materials, and waste sector; (13) financial services sector; (14) chemical sector; (15) defense industrial base sector who support the essential services required to meet national security commitments to the federal government and military; and (16) commercial facilities sector, which includes real estate (e.g., office and apartment buildings, condominiums, mixed use facilities, self-storage) and retail (e.g., retail centers and districts, shopping malls).
Guidance on the Real Estate Industry, Specifically With Regard to Commercial Landlords:
The commercial facilities subsector includes office buildings, office parks, apartment buildings, multifamily towers and condominiums, self-storage facilities, and property management companies. These facilities comprise the properties in which many Americans live and in which businesses operate every day. According to data released from National Multifamily Housing Council (“NMHC”), there are over 17 million multi-family households across the U.S. Also, the Building Owners and Managers Association (“BOMA”) 2020 Office Market Study highlights that the commercial real estate market is vital to the U.S. economy, contributing $204.4 billion to the national gross domestic product (“GDP”), generating or supporting 1.4 million jobs, and tallying 6.6 billion square feet of office space among BOMA members. The real estate industry should be aware of several key aspects of these governmental and state directives, orders, and guidance as they become more prevalent amid COVID-19.
Since the commercial facilities subsector is classified as an essential critical infrastructure, many states have exempted this subsector under state EOs. However, these state-specific EOs are nonetheless creating confusion in the real estate industry. Even though many of these EOs are similar in nature, they may vary meaningfully in application due to each state’s reliance on its own definitions of which workers are part of an “essential and critical workforce” (or similar terminology). For example, California and Connecticut rely on CISA’s guidance for identifying 16 critical infrastructure sectors, while others states have created their own standards, definitions and guidelines. Commercial landlords with properties in states that have issued EOs which temporarily require residents and businesses to shelter in place are trying to determine whether they will actually be forced to close down (or be required instead to remain open on a normal or limited basis) in the face of these EOs if certain of their tenants are defined as “essential critical infrastructure”. If the tenants are defined as such, then the employees would need to continue working and the landlords presumably will be able to (and are likely required to) continue their real estate operations in a sufficient manner as would allow these essential critical infrastructure workers access to their premises.
In California, Governor Gavin Newsom signed Executive Order N-33-20 mandating that all individuals stay home or at their place of residence to protect public health, but exempting certain essential services, including critical infrastructure sectors. The reference to “critical infrastructure sectors” refers to CISA’s guidance. Thus, rental industry professionals are permitted and have a “special” obligation to maintain continuity of operations. However, CISA guidance is not a federally mandated directive, and other state and local governments may therefore decide upon different definitional standards when enacting their respective state-specific EOs. In New York, Governor Cuomo signed Executive Order No. 202.8 (amending Executive Order 202.6), which, effective as of March 22, 2020 and until further notice, mandates that all businesses and not-for-profit entities in the state shall utilize, to the maximum extent possible, any telecommuting or work from home procedures that they can safely utilize and reduce the in-person workforce at any work locations by 100%. However, the New York State standard (which makes no mention of the CISA guidance) further provides that any essential business or entity providing essential services or functions shall not be subject to the in-person restrictions and that an entity providing essential services or functions, whether to an essential business or a non-essential business, shall not be subjected to the in-person work restriction, but may operate at the level necessary to provide such service or function.
This confusion is further highlighted by a recent March 22, 2020 letter from NMHC and the National Apartment Association (“NAA”) to CISA, which urged a clarification on who is an essential critical infrastructure worker and called for CISA to explicitly designate residential property management staff and housing construction workers as essential employees. In this letter, NMHC and NAA urged CISA to “confirm that multifamily operations and the staff needed to ensure continued access to the homes where millions of Americans are sheltering in place are deemed ‘[e]ssential [i]nfrastructure,’ by the federal government.” This would also include construction, operation and management of housing.
In sum, each individual and business must look to the following guidance to plan ahead and determine the specific impact on their real estate operations in light of the COVID-19 pandemic: (1) applicable state-specific EOs, which may have followed CISA’s guidance or deviated from CISA and established their own definitional standards, and (2) CISA guidance absent any applicable state-specific EOs.
General Impacts on Commercial Landlords:
In terms of operations, retail leases often require tenants to operate for minimum retail business hours or to operate fully staffed, and many commercial leases provide that abandonment of the premises as a default. Due to the increasing number of shelter-in-place and similar EOs issued by state or local governments, many businesses will be unable to operate fully, and as such, risk failing to comply with these covenants in their commercial leases. This could have a negative impact on a commercial landlord’s property and its value. For example, what are a commercial landlord’s options if a tenant (a) decides or is forced to shut down operations amid COVID-19 or (b) abandons the property permanently as a result thereof? As discussed in our prior client alert, it is critical for the landlord and the tenant to maintain close communication since “[l]andlords are grappling with the same issues as their tenants and are themselves trying to figure out how to deal with market disruptions.” Commercial landlords and tenants should engage with one another to plan for and document appropriate modifications to any lease requirements regarding operations, as it is in the best interest of both parties to navigate this crisis in a transparent and effective manner.
In terms of common areas, many proactive commercial landlords are already contacting their tenants and proposing accommodations and new restrictions amid COVID-19, while allowing the tenant full and meaningful access to its leased space. In following the directives of the Center for Disease Control and Prevention (“CDC”), many commercial landlords are restricting the use of common areas of their properties -- in retail spaces, common areas such as access to food courts, sitting and other gathering areas, and play areas for children, are restricted; in office spaces, areas such as workout facilities, conferences rooms, and other building amenities, are restricted; and in residential spaces, areas such as workout facilities, pools, conference centers, and other building amenities, are restricted. A commercial landlord should confirm with their Seyfarth professional or review their lease documents to determine the specific rights and obligations to tenants with regard to common areas in the event of a crisis such as the COVID-19 pandemic. It should be noted that, however, it is unlikely that a restriction on common area usage during a pandemic would rise to the level required to be deemed a constructive eviction.
In terms of routine preventive measures, such as maintenance and sanitation, the commercial landlord should stay informed of evolving guidance coming from healthcare professionals and state and federal governments. The commercial landlord should consider assisting tenants who are allowed to or are required to remain open as an essential or critical business or worker. For example, the commercial landlord could post notices or distribute notices to all tenants, providing guidance on practicing social distancing and limiting the spread of COVID-19, and provide guidance on what to do in the event that a tenant or an employee of a tenant believes that they have been infected or exposed. Additionally, commercial landlords and tenants should consider making hand sanitizer widely available at areas of the building that are unrestricted or out of the landlord’s control, such as the entrances and exits and in high-traffic areas of the building in general, and significantly increase the frequency of cleaning of all “high touch” areas, such as doorknobs, stair rails, elevator buttons and the like. It may be prudent to increase janitorial services provided to tenants and unrestricted common areas that are of high-traffic.
In terms of physical alterations of commercial spaces, the commercial landlord should assist with tenants’ attempts in promoting social distancing to the extent possible. However, it is unlikely that a tenant who makes physical alterations to such leased space without a commercial landlord’s express consent would be excused under their lease obligations. It is in everyone’s best interest, including both the commercial landlord and tenant, for the landlord to consent to reasonable changes made in good faith to minimize the spread of COVID-19 throughout the entire commercial property.
Commercial landlords and tenants must proactively and openly communicate with each other and, to the extent possible, coordinate such efforts to mitigate the spread of COVID-19 and its potential impact on both the commercial landlord’s and tenant’s operations. However, both landlords and tenants are materially and adversely impacted in ways that no one could have anticipated, and, as such, it is in everyone’s best interest to err on the side of communication between the parties.
Seyfarth is closely watching this situation around the clock and is uniquely prepared to protect your interests, help you mitigate risks and liabilities, and keep you informed regarding the latest implications related to the COVID-19 crisis.