In the midst of the COVID-19 global pandemic, many commercial tenants are wondering if they can stop paying rent pursuant to their commercial lease since they cannot use their leased premises as a result of “shelter-in-place” (“SIP”) orders requiring the closure of non-essential businesses. As the pandemic has continued over these many months, some tenants are also wondering if their commercial lease can be terminated early.
The first impulse for many lawyers is to review the force majeure clause in the commercial lease to see if that would provide tenants some relief in this situation. Force majeure in contract law means unforeseen circumstances which makes performing a contract temporarily impossible. The idea is that if there is an event outside of a party’s control, that party has a justifiable excuse for a delay in performing its obligations under the lease. So, for example, if the landlord is supposed to finish tenant improvements for the tenant by a certain date and landlord cannot complete the work because of a strike, then the landlord may be able to claim “force majeure” and claim that its obligation to complete the tenant improvements should be extended by the number of days of the strike.
Are the governmental regulations requiring “shelter-in-place” considered a force majeure event excusing the payment of rent? The short answer is that a typical force majeure clause specifically excludes the tenant’s obligation to pay rent, meaning that even if there is a force majeure event and even if an SIP order is deemed a force majeure event, the tenant has to pay rent.
It is customary for commercial leases to include a force majeure clause. However, in the vast majority of cases, such force majeure clauses do not typically apply to a tenant’s obligation to pay rent. In fact, these clauses are almost always drafted so that the tenant’s obligation to pay rent is specifically not subject to a claim of force majeure.
Here is a typical force majeure clause in a commercial lease:
Except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease, any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform (collectively, a “Force Majeure Event”) shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party’s performance caused by a Force Majeure Event.
Sometimes rather than a specific reference to tenant’s rent obligations in force majeure clauses, there will be a statement that tenant’s “financial inability” to meet its rent obligations is not a force majeure event.
Future blog posts will deal with other grounds for commercial tenants to claim that the COVID-19 global pandemic and associated SIP orders excuse a commercial tenant from its rent obligations under a commercial lease. These arguments include claims based on constructive eviction, frustration of purpose, and impossibility of performance.
So if the commercial lease does not provide the tenant with a right to stop paying rent as a result of COVID-19, what should tenants be doing? The following steps provide guidance on how to begin analyzing a tenant’s options:
1) Tenant’s counsel should carefully review the force majeure clause to determine whether such clause includes the standard carve-out for tenant’s rent obligations (i.e., Tenant is not excused from paying rent by claiming force majeure). Counsel should also consider whether there are other provisions in the lease which might excuse tenant from paying rent.
2) Tenants should document the impact that COVID-19 and associated governmental orders are having on the bottom line. They should carefully track any decline in business income or other ways in which its business has been negatively impacted. Tenants should include an analysis of the financial impact of modifying its business model in order to continue operating even on a limited basis. For example, some restaurants have been able to stay open for limited hours by providing a “grab and go” service or delivery.
3) Tenants should discuss with their insurers to see whether business income insurance will provide any relief.
4) Tenants will need to carefully evaluate whether – and how long – they will be able to pay rent. If a tenant’s business income has been dramatically impacted and tenant has been or will be unable to pay rent, tenants should reach out to their landlords as soon as possible to discuss possible workouts so that the tenant will not be in default under the lease.
5) In San Francisco and many other jurisdictions, small business owners can take some comfort that there has been a temporary suspension of commercial (and residential) evictions for non-payment of rent. For example, San Francisco’s moratorium on commercial evictions for businesses suffering from financial impacts caused by COVID-19 was issued on March 17, 2020, and has been extended multiple times with the latest extension expiring on September 14, 2020. These ordinances typically provide that small businesses cannot be evicted for a limited period of time for failure to pay rent due to loss of income caused by COVID-19 and provide for additional time to make rent payments. In the San Francisco ordinance, a small business is defined as a business with less than $25 million in gross receipts in 2019. However, tenants should remember that these ordinances are not a “free pass” to stop paying rent. These commercial eviction moratoria are not “automatic” as most require that commercial tenants provide landlords with evidence of the negative impact of COVID-19 on their business income. Savvy commercial tenants should proactively engage with their landlords to work out solutions.
Counsel should review local ordinances to determine whether there are any ordinances in effect protecting tenants from eviction during the COVID-19 pandemic.
I am an attorney, but unless I am already your attorney, then I am not your attorney and this update does not create an attorney-client relationship. I am licensed to practice law in California and Nevada and have based the information presented on US laws. This blog post is legal information and should not be seen as legal advice. You should consult with an attorney before you rely on this information. Woodsum Law Offices provides guidance to landlords and tenants in navigating the effects of the COVID-19 global pandemic on commercial leases.
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