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Covid-19 Client Advisory

Many of our clients have been asking to what extent present circumstances excuse them from operating their store or business and/or paying rent while their store or business is closed.  The following is intended to give a general overview of the issues involved as well as my thoughts and recommendations.

If I close my store, will I be in violation of my obligation under my lease to remain open?  And if I shut down my store or business, will I be considered to have abandoned the premises?

While every lease is different and state law can vary, in my opinion, the short answer to both questions is no.  Obviously, if the tenant operates a store in a mall that has been closed by the landlord, the issue is moot because the landlord could hardly hold a tenant responsible for a lease violation that the landlord not just caused, but required.  The issue is also moot if a governmental order has been issued forcing the closure of the tenant’s particular business because, under any commercial lease, the tenant is required to comply with all applicable laws.

But for those who are operating a store or business that has not been ordered closed and that is either in a mall that is still open or in a stand-alone location under a lease that has minimum store hours or a sales-based kick-out that is contingent upon remaining open, I believe that the temporary closing of the store or business under the present circumstances would not violate any such operating covenants due to force majeure. 

force majeure event is an unanticipated event that is beyond the reasonable control of a party and that makes performance of a particular act by such party impossible.  Performance of that act is excused for so long as the force majeure event continues.

While traditional case law holds that force majeure excuses performance (here, operating a store or business) only when it makes such performance physically impossible (not just expensive or inconvenient or unprofitable), I believe that an argument can be made in good faith that, if the event makes performance a clear, present, serious and unavoidable danger to the health and safety of the general public, that, too, would qualify as a force majeure event.  And in the case of a store or business closing, such an argument would find support in both CDC findings and recommendations as well as governmental mandates designed to limit and in some cases prohibit social contact in order to minimize the spread of the Covid-19 virus.

As a practical matter, it is my opinion that a landlord would not likely object to such an argument, after some initial grumbling, for it knows that, if it were to force a business to remain open in the face of a clear and imminent danger, and either an employee of the tenant or the landlord, and/or a customer, and/or a friend and/or family member of any of the foregoing, were to become infected as a result, the landlord could be held liable.

The same force majeure argument lies with respect to abandonment.  Closing would not amount to an abandonment of the premises, which in some leases is an event of default, provided (1) the premises (including an office) have not been cleaned out (that is, where all fixtures, furniture, equipment and other personal property have been removed, suggesting no intention of resuming operations) and (2) the tenant continues to pay rent unless excused from doing so (more on that below).

If I do close my store, office or business, can I also stop paying rent? 

This is a more complicated issue.  And it, too, depends on the terms of the relevant lease and applicable state law.

Many commercial leases provide that, even in the case of force majeure, such an event does not absolve the tenant of its obligation to pay rent.  And some commercial leases go on to say that a lack of funds is not an event beyond a party’s reasonable control (in other words, is not a force majeure event).

From a landlord’s point of view, the possibility of a force majeure event is what a tenant’s business interruption insurance is for.  Unfortunately, most business interruption insurance policies do not cover this type of situation.  Some even expressly exclude bacterial or viral infections.  (You should check what your insurance policy says.)

However, given the state of the economy and the commercial leasing market in general, most landlords realize that it would be next to impossible to find a new tenant if the landlord were to declare a default and terminate the lease of a tenant who stopped paying rent because it had to close its store or business.  And for the landlord to then sue that tenant, who may be on the verge of insolvency, would not be an efficient use of what are now the landlord’s very limited resources, especially if that action were to tip the scales and force the tenant into bankruptcy.

So, a tenant has two choices.  The less aggressive and more defensible approach is to stop paying rent and advise the landlord that they (the tenant) are deferring rent, to be made up at the back end of the lease.  The landlord will not be happy, but at least they know they still have a tenant and a lease; they just have a cash flow problem.

The more aggressive and less defensible approach is to stop paying rent and advise the landlord either that they (the tenant) are withholding (that is, abating rent) or that they are terminating the lease due to the inability to operate the store for what could be weeks or months, or possibly longer.  The landlord will not be happy here, too, but they may instead become angry and look to avail themselves of various remedies available under the lease or local law.

Either approach could be used to initiate discussions about an adjustment in rent.  But, in all probability, the trade-off in both cases would be a requirement by the landlord that whatever new reduced rent is agreed to must, at best, be paid going forward, even if the store remains closed, and, at worst, be paid retroactive to the date the tenant stopped paying rent.

The approach to be taken in any case depends upon a variety of factors, including the terms of the particular lease, applicable state law, the desire to retain that location, the tenant’s relationship with the landlord and the existence of any personal or corporate guarantees.

If we can be of any assistance in helping you navigate through the current situation with any of your locations, please do not hesitate to contact us.

 

 

Scott A. Klion is Of Counsel to HBA in the area of commercial leasing. His practice is devoted to the negotiation, preparation, and interpretation of office, retail and industrial leases.