Commercial landlords face difficult decisions as the COVID-19 pandemic, and related shutdown orders, lead many tenants to seek rent relief. We recommend that landlords consider both their legal rights and their business interests and that they be proactive instead of merely reacting to tenant requests.
The legal rights of landlords and tenants will be determined primarily by the provisions of their respective leases, the scope of applicable government shutdown orders and principles of contract law.
Most leases do not say whether a tenant is obligated to pay rent if the tenant’s business operations from the premises are prohibited or sharply curtailed by law. In the absence of a lease provision addressing this issue, tenants searching for a legal justification for not paying rent may turn to the frustration doctrine of contract law. If cases from the Prohibition and World War II eras are followed in connection with the COVID-19 crisis, and if the frustration doctrine is applied to short-term restrictions such as the present shutdown orders, a tenant may have a defense to payment of rent if the tenant cannot make any lawful use of its premises. The tenant is less likely to prevail if the tenant can operate for limited purposes, such as a restaurant that can accept orders for takeout and delivery.
Landlords have an economic incentive to help good tenants make it through this extremely challenging period. One approach that some sophisticated landlords are taking is to offer partial rent deferrals based on the level of impact that governmental orders have on a tenant’s business, with tenants that are not allowed to operate at all receiving the highest percentage of deferral and tenants that are not affected because they qualify as essential businesses getting a smaller deferral or none at all. Lease amendments of this type can be drafted to require tenants to apply for governmental assistance (such as under the CARES Act) and insurance proceeds for which they may be eligible, thereby providing a source of funding for rent while also helping tenants to meet their other obligations.
Landlords have many options if they wish to offer a limited rent deferral while protecting their own interests. If you wish to explore these options, please contact the LimNexus COVID-19 advisory group ([email protected]) or contact any LimNexus attorney via www.LimNexus.com
This article is not intended to provide legal advice. Each business should seek legal advice specific to its individual circumstances.