The Coronavirus or COVID-19 pandemic and the governmental response to it have raised new issues for owners of commercial real estate, as well as a level of disruption to the ordinary management of commercial buildings not seen since 9/11. President Trump has declared a national emergency, and most states (including Massachusetts), the District of Columbia, and many individual cities and towns across the United States have declared states of emergency, restricting the operations of restaurants and bars and gatherings of more than 10 people.
This is a rapidly evolving situation, and this Alert attempts to answer questions that building owners with commercial tenants are asking based on our current conditions. This discussion assumes typical lease provisions, but most issues may be affected by the specific language of the lease between the parties.
To date, all government guidelines and orders are directed to the operation of businesses—the tenants—and not to building owners. Building closures have not been required by any governmental order, and a closure by a landlord acting on its own would likely breach lease requirements that the tenant have access to its premises. Most leases would permit imposing restrictions on access for security reasons, as is typically done on non-business days.
Tenants may claim that rent is not payable during this pandemic due to reasons outside of the lease, such as force majeure or impossibility, discussed below. However, few if any current leases excuse payment of rent because the tenant is unable, or even not permitted, to operate its business. Tenants negotiating leases in the future may seek to provide for rent abatement if they are not permitted to operate due to a government order, but the reality for landlords is that mortgagees still require monthly payments, and likely would not permit leases that expressly provide for such an abatement right. In the event of non-payment, landlords will be required to look to security deposits or lease guarantors, if any.
Force majeure, generally considered “Acts of God” or other causes beyond the control of the parties, is defined in a well-drafted lease, and can be the subject of negotiation. The definition may or may not include governmental action. The language of the lease is crucial and will override common law claims that performance is excused due to force majeure. Most landlord forms of lease use the definition to excuse only performance by the landlord of its obligations, not the tenant. While tenants might want to claim force majeure in the form of the pandemic as a legal argument against payment of rent, the limitation of the use of the defined force majeure in the lease would make that argument difficult.
Doctrines of Impossibility/Frustration of Purpose
Massachusetts recognizes the doctrines of “impossibility” and “frustration of purpose,” which can excuse performance on a lease if “an event neither anticipated nor caused by either party, the risk of which was not allocated by the contract . . . destroys the object or purpose of the contract, thus destroying the value of performance”. Chase Precast Corporation v. John J. Paonessa Company, 409 Mass. 371 (1991). We can expect to see these doctrines raised as defenses by tenants if they default in rent payments. Why should they pay rent if they cannot operate their businesses in the premises?
Certainly the pandemic was not “anticipated or caused by either party,” but in most leases we will find that the risk was allocated by the parties. The lease will usually provide that rent is due, except as specifically otherwise provided in the lease. Landlords will argue they have fulfilled their part of the contract – the premises are available for use, even if the employees are required to stay home. We also hope and expect that the interruption is temporary, so that the obligation for the remaining years should not be extinguished.
What Should Landlords Do?
The pandemic and the necessary responses are disrupting established business relationships in every way imaginable. Landlords are generally in a strong legal position under their leases, but should take pro-active steps to protect themselves. However, like any long term business relationship, there may be some room for non-legal give and take as we try to emerge from this crisis as best we can.
This Alert has been prepared by Prince Lobel’s Real Estate Practice Group. If you have any questions or require additional information, please contact Rob Schlein, Chair of the Practice Group, firstname.lastname@example.org 617-456-8098, or Rick Sousa, email@example.com 617-456-8123.