With the spread of the Coronavirus there are certain unavoidable circumstances that many businesses are having to address for the first time. The Coronavirus has forced businesses out of traditional commercial leasing environments (like office and retail) into remote operations or simply shutting down completely.
This begs a few key questions:
Step 1: Eviction Moratoriums
The landscape of evictions is literally changing by the day. The government is issuing emergency stop gap measures to help struggling businesses that have been blindsided by this crisis. For example, Los Angeles Mayor Garcetti just issued an emergency order stating:
“No landlord shall evict a commercial tenant in the City of Los Angeles during this local emergency period if the tenant is able to show an inability to pay rent due to circumstances related to the COVID-19 pandemic. These circumstances include loss of business income due to a COVID-19 related workplace closure, child care expenditures due to school closures, health care expenses related to being ill with COVID-19 or caring for a member of the tenant’s household who is ill with COVID-19, or reasonable expenditures that stem from government-ordered emergency measures.”
A provision in the order gives eligible tenants up to three months following the expiration of the local emergency period to repay any back due rent.
Accordingly, it is important to check local eviction moratoriums when considering whether to pay rent.
Although this order may prevent an eviction, it does not necessarily mean that the tenant is fully relieved of its obligation to pay rent. This is an evolving area.
But, there is more to the analysis than simply reviewing local eviction orders and moratoriums.
Step 2: The Lease Terms Themselves
The second step in analyzing a tenant’s obligation to pay rent or possible rent relief during the Coronavirus is to examine the terms of the actual lease at issue. A typical commercial lease will have provisions dealing with both frustration of purpose and force majeure (commonly known as an act of God). A review of these provisions will help determine whether the lease contemplates that the tenant will still be obligated to pay rent, regardless of their actual ability to use the leased premises.
For example, a lease may have a force majeure provision that specifically identifies certain situations that are deemed a “force majeure”. A force majeure provision is a provision in the lease that contemplates certain unexpected acts that may relieve the tenant of its obligations under the lease. It is not uncommon to see the definition include “acts of God” or “governmental actions”….. “beyond the reasonable control of the party obligated to perform…” This language suggests that the tenant is relieved of its obligations under the lease when these situations occur.
Next, we must determine if there are any exceptions or provisions in the lease that are not subject to the force majeure provision. For example, did the landlord specifically state that Force Majeure could not be used to avoid the monthly rent obligation? If not, then perhaps rent is not due if you are ordered away from the leased premises.
The lease may even go so far as to say something like: “Force Majeure shall excuse the performance of such party for a period equal to any such prevention, delay, stoppage or inability.”
Accordingly, if your lease has this language, and no restriction on the applicability to the rent obligation, then you may be able to legally withhold rent if you are ordered to stay away from work (like in the San Francisco Bay area and other places that “lock down” orders are in place).
What if your lease is silent or does not have a force majeure provision? In that case, you may be able to seek relief from the lease obligations by arguing frustration of purpose. For example, when a lease restricts a tenant’s use for a particular purpose, if the tenant cannot use the lease for that purpose (because of a government order), then the tenant can argue commercial frustration.
The doctrine of commercial frustration is similar to the impossibility doctrine. The idea being that you can be excused from performance under a contract due to an extreme hardship that neither party foresaw. The doctrine provides that even if performance is still possible, the value of performance may be destroyed by the chance event which can give the tenant an ability to terminate the lease.
We Can Help
Commercial leases vary according to their specific terms. The unprecedented events and interruption in business caused by the Coronavirus is both shocking and debilitating to many businesses. We are here to help. We offer commercial lease reviews where we can analyze whether your business may be able to save rent or even cancel a lease based on the recent events.
For help reviewing your commercial lease, contact us today. We are fully operational (working remotely) during these tough times we all face. You can call us at (310) 954-1877, or message us through our contact form.