The Impact of COVID-19 on the Commercial Real Estate Market

Wilson Sonsini Goodrich & Rosati
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Wilson Sonsini Goodrich & Rosati

Introduction

The COVID-19 pandemic has resulted in increasingly restrictive government orders throughout the United States that may largely prohibit businesses from accessing and operating from their leased facilities. Most commercial and industrial lease forms in the United States require the payment of rent by tenants despite these disruptions; however, a careful legal review of each lease contract and relevant statutory law and equitable principles applied to the unique facts and circumstances of each tenancy may yield rent relief or possibly a tenant termination right.

This Wilson Sonsini alert highlights the contractual lease provisions and statutory and common law principles that may mitigate tenant lease obligations relating to COVID disruptions.

Contractual Provisions

Many commercial leases contain provisions that could possibly result in rent relief related to disruptions caused by the current pandemic, including provisions relating to the following:

  • Delivery and commencement
  • Access and service interruptions
  • Casualty
  • Condemnation
  • Quiet enjoyment
  • Force majeure events
  • Completion of tenant improvements

For example, a favorable provision governing access and service interruptions may provide a tenant with a right to rent abatement if a condition exists that prevents use of the premises following a short grace period or even a termination right if the interference persists for a longer period (e.g., 90 days). Note, however, that consideration should also be given to the extent the tenant is actually using the premises to operate necessary equipment and for essential operations.

Statutory Provisions

In addition, legal review of rental obligations following COVID interruptions should take into consideration potential statutory and common law doctrines that might supersede seemingly contradictory contractual provisions. These doctrines include the following:

  • Covenant of quiet enjoyment
  • Constructive eviction
  • Inverse condemnation
  • Impossibility of performance
  • Commercial frustration
  • Defenses to non-performance (California Civil Code §1511)

Insurance

Most businesses carry business interruption and/or civil authority insurance as part of their primary property insurance coverage. While these policies typically require property damage to trigger coverage, to the extent an insured can argue that a cause of loss has occurred related to COVID, such insurance may compensate businesses for lost profits, relocation costs, payroll, taxes, etc. All businesses should carefully review the terms of their insurance policies in an effort to determine whether filing a claim is advisable.

Construction

Many leases require the performance of construction by the landlord as a condition to the occurrence of the rent commencement date, which shifts to the landlord the risk of delivery delays caused by COVID prohibitions on continuation of commercial construction projects. Even leases that grant a tenant a specified period of time to perform construction prior to rent commencement may contain provisions that extend such construction periods for matters outside of the tenant's control.

Practical Considerations

The COVID-19 pandemic is likely to have a material impact on the commercial real estate market for the foreseeable future. For those businesses that are looking to enter into new leases or extend current leases, we expect more tenant-favorable terms and reduced market rent. For businesses with active leases, we recommend carefully considering the contractual, statutory, and common law implications of the pandemic and reviewing each for beneficial rights.

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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