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Leasing Considerations During COVID-19 Pandemic

March 26, 2020

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The COVID-19 pandemic is having a wide-ranging impact on the U.S. real estate industry, particularly on the relationship between landlords and tenants. In order to better understand impending risks, both landlords and tenants should review their leases and insurance policies and consult real estate counsel before taking action. A sampling of leasing issues arising during the COVID-19 pandemic is set forth below.

Disclosure of Confirmed Cases

Landlords and tenants need a plan in place to immediately notify appropriate parties after receiving notice that a person who has been diagnosed with COVID-19 previously visited a tenant’s premises or the common areas of a landlord’s building. Although the law is not yet clear regarding how parties should disclose this information, if at all, parties should consider promptly disclosing all COVID-19 cases, in a manner that does not violate applicable privacy laws, to protect the health and safety of the building’s occupants and the general public.

Force Majeure

Invoking Force Majeure. Many leases contain a “force majeure” (or an “unavoidable delays”) provision, which, if applicable, would allow for delays by landlords and/or tenants caused by certain unavoidable events. Because a pandemic is unlikely to be specifically named in a force majeure provision, whether COVID-19 constitutes a force majeure event is specific to each lease and remains open to interpretation (and likely, contentious litigation). Neither landlords nor tenants should assume that the effects of COVID-19 will limit liability under their leases, no matter how dire the circumstances. Some leases may require written notice in order to invoke force majeure protections, and a party failing to provide such notice may risk waiving such protections. Ultimately, a successful invocation of force majeure does not excuse the party asserting force majeure from complying with the lease; it only extends deadlines temporarily.

Applicability of Force Majeure. In addition to disputes caused by late or withheld rent payments or other monetary obligations, force majeure may be applicable to the following scenarios:

  • Delays in delivering possession (and resulting rent commencement dates) due to restrictions on construction and governmental permitting operations;
  • Landlords closing buildings and interrupting tenants’ access due to mandatory governmental shutdowns;
  • Tenants ceasing operations in the premises, which may violate “continuous operations” requirements; and
  • Tenants’ reduced revenue, which could result in decreased revenue-based rental payments.

Insurance

Contact Insurance Providers Immediately. Landlords and tenants should consult their insurance providers and review insurance policy coverages, including those found in endorsements and extensions to the policy, to determine which coverages may apply to the loss of business caused by COVID-19. Parties must be mindful to timely give their insurers notice to the extent required to preserve any such claims.

Rent Deferral

Negotiating Practical Solutions. Insurance remedies may not provide relief in the near term, as insurers are still evaluating their response to coverage claims, and it may take many months of litigation before clear direction is available. Accordingly, landlords and tenants should consider negotiating practical solutions to resolve the immediate burdens placed on the parties (i.e., tenants’ need for monetary relief, and landlords’ need to avoid tenant defaults and tenant vacancies). An immediate source of relief in an urgent situation where a tenant has been required to shut its doors would be for a landlord to allow deferral of rent payments. However, a landlord’s willingness to grant rent deferral will depend on many factors, including whether the property is commercial or residential, whether the tenant’s business is damaged or forced to close due to COVID-19 or a government mandate arising therefrom, the creditworthiness of the tenant, and whether the landlord’s mortgage lender is willing to grant similar mortgage payment deferral to the landlord.

Casualty

Invoking Casualty. Whether the COVID-19 pandemic would be considered a casualty is an evolving area of the law. Casualty clauses within leases vary widely and landlords and tenants should consult real estate counsel to determine the potential applicability of the notice obligations, termination options, repair/restoration obligations, and rent abatement remedies set forth therein. Parties unable to obtain adequate relief via force majeure clauses, business interruption insurance claims or negotiated work-outs may ultimately decide to take a broader view of the effects of COVID-19 pandemic in an effort to seek rent relief under casualty provisions. However, given the difficulty of establishing property damage caused by COVID-19, and the duration of such damage, successful claims under a casualty provision may be less likely.

If you have any questions about the information in this alert, please contact Kyle Hauberg (248-203-0871 or khauberg@dykema.com), Bob Linton (312-627-2274 or rlinton@dykema.com), or your Dykema relationship attorney.

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