COVID-19: Your commercial lease & rental obligations
With unprecedented economic impact on New York City’s retail, restaurant and hospitality businesses, Farber Schneider Ferrari LLP urges owners to consider how their rent obligations may be affected by the coronavirus (“COVID-19”) pandemic.
As with most (if not all) commercial leases in New York City, nearly all of the provisions—whether in the boilerplate lease or the rider—skew heavily in the landlord’s favor.
Chief among them: no matter what the reason, the tenant is not allowed to suspend, offset, discount, or abate its rental obligations (including other payment recurring payments deemed “additional rent” such as taxes, utilities, cleaning charges, etc.) irrespective of the cause. That applies even if (or when) third parties, such as utility companies, shut off essential services for safety reasons such as a dangerous gas leak or flood, or other external circumstances that could render a business completely inoperable.
Generally, the landlord is completely indifferent to any and all external factors, expecting the rent to be paid no matter what—the business operability and finances of a commercial tenant are immaterial. This “*@%& you, pay me” attitude breeds an unwillingness on the part of the landlord to give time or renegotiate terms already agreed to in writing. Arguably however, there may be some avenues of relief for tenants who proactively communicate, and who understand the practical ramifications of their lease against the backdrop of New York legal precedent.
Force Majeure as An Exception to Lease Obligations
The only potential exception to the above is made by invoking the force majeure a/k/a “Act of God” language contained in most commercial leases. Such a clause is invoked by tenants when circumstances completely beyond their control render them unable to meet their contractual obligations including the payment of rent. Such events include, without limitation, terrorism, hurricanes, tornados, war, rioting, labor strike, and various other external factors preventing performance, but in all events circumstances beyond the parties’ control.
Landlords may also look to such a clause to relieve themselves of obligations as well (whether to the tenant, net lessor, building owner or lending institution), but in all contexts, such provisions may suspend the obligation of the performance of duties, either temporarily or permanently. Such a clause can rarely be invoked except in very limited circumstances, but if successfully employed will typically excuse performance based upon extreme unforeseen and avoidable events.
Force Majeure and the COVID-19 Pandemic Impact on Business
At the time of this writing, nearly 820,000 cases and 40,000 deaths have been confirmed worldwide. In New York, the government has required all “non-essential” businesses to suspend operations to help contain the spread. The staggering impact on business operations cannot be overstated.
Thus, unless your business is “essential,” through circumstances completely beyond your control, your activities have likely been limited to what can be done remotely, or you have been forced to shut your doors. This pandemic may have decimated your near-term business outlook.
So, is this force majeure set forth in, or applicable to, your Lease? Does the COVID-19 outbreak suspend your rent and other payment obligations to your landlord?
The standard wording of force majeure clauses does not reference pandemics or viral contagions specifically. Accordingly, though the current outbreak has caught the world off guard, this is a novel issue regarding commercial landlord-tenant relationships which the Courts will soon determine.
Farber Schneider Ferrari LLP sees a strong argument that it is. The leading legal dictionary defines “force majeure” as “an event which can neither be anticipated nor controlled” and a “force majeure clause” as “contractual provision allocating the risk of loss if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.” COVID-19 would certainly appear to apply. While Courts hold that force majeure clauses may be contractually narrowed, any clause not expressly excluding a pandemic could arguably include it.
Legislative action is in flux, so it is currently unknown what if any business loan, stimulus, or other fiscal relief may be available to keep business owners afloat during the shutdown interval. Therefore, all commercial tenants are strongly urged, irrespective of their size or income, to scrutinize their lease for any provision including force majeure clauses which could relieve or delay performance of rent obligations.
The murky future of COVID-19’s full scale impact renders uncertain how long your business may be affected. The adjudication of the issues presented here are also far from certain; one is forced to consider a proactive approach, in the face of this crisis, to exploit the terms of one’s tenancy to bridge the gap.
In this regard, business owners should also consult with trusted counsel who can identify and preserve their most viable legal positions. Avoiding legal trouble requires identifying issues before they arise and determining how lease language and applicable law affects the future of your tenancy.
Even if your lease does not contain “Act of God” or other force majeure language, the legal doctrine of “impossibility” could be relevant or available to wholly abrogate rental obligation. A contractual duty also may be discharged where performance is subsequently prevented or prohibited by governmental action. See e.g. Consumers Power Co. v. Nuclear Fuel Services, Inc., 509 F. Supp. 201, 210 (W.D.N.Y. 1981).
An obvious argument could be, “during COVID-related mandatory shut-down, I was, in a very literal sense, legally barred from opening my doors, so how could it be equitably determined that I should owe money for that time period?” However, that may not carry the day.
In the United States, an impossibility defense is rarely allowed unless the impossibility is “objective”, i.e. no one similarly situated could have performed. If this were the stopping point, we would advocate that COVID-19 should certainly qualify. However, the question presented is often more nuanced than that. Prevailing on the defense of impossibility requires:
Something unexpected must have occurred;
Risk of the occurrence must not have been allocated by agreement or by custom;
The occurrence must have rendered performance commercially impracticable.
In all landlord-tenant contexts, the landlord will surely argue that the lease explicitly allocates all risk upon the tenant (though, the landlord still needs to prove that applicable language is enforceable). In support, they will cite to the fact that most commercial leases contain several redundant clauses allowing for no offset of rent for any reason. However, even assuming the landlord is right, and the lease agreement allocates all risk upon the tenant—it may be violative of public policy for a Court to enforce such lease terms to such severe detriment to the tenant.
Moreover, Courts have held that unforeseeable intervening governmental activity will excuse performance of the contract. See A & S Transp. Co. v. County of Nassau, 154 A.D.2d 456 (2d Dept. 1989); see also Metpath Inc. v. Birmingham Fire Ins. Co. of Pennsylvania, 86 A.D.2d 407 (1st Dept. 1982)). Here, we would argue that in the COVID-19 context, while widespread effects of the viral outbreak may or may not have been foreseeable, the government efforts to contain the spread of the virus, including its mandate to close doors and stay home, qualify as a completely unforeseeable act.
Landlords will argue—especially with regard to commercial tenants in the hospitality industry—was earning money objectively prevented 100% by government shut down? Could your restaurant or other service business pivot to other commercially viable solutions such as delivery service? This argument highlights the requirement to demonstrate own good faith when seeking to be discharged from a contractual obligation because performance was impossible. Any defense of impossibility due to governmental action will force an examination of the party’s conduct who pleads such a defense. Being able to show efforts (wherever possible) to mitigate business damage while otherwise complying with all lease provisions, is a must.
Equity & the “Interests of Justice”
Another potential defensive avenue to invalidate rental obligations finds its home in the notion of basic equity—fundamental fairness. If a tenant is unable to operate owing to a forced closure, whether through an “Act of God” or otherwise, she should argue that she must thereby be relieved of the payment of rent during such period where she was prohibited from operation.
Obviously, all business owners unable to operate during this time will consider it inequitable to have to pay rent when some condition not of its own creation has forced them out of the premises. While the current governmental mandate should fall within that, note that many leases will have language requiring that rent be paid irrespective of the businesses’ ability to run its business—a circumstance for which business interruption insurance is often implicated.
At the time this article was written, there is a bill pending in the New York State Senate relating to suspending rent payments for certain residential and (small business) commercial tenants declaring a ninety-day moratorium inclusive of mortgage payments.
Also, earlier this week New York City Mayor Bill DeBlasio indicated he’s working on a bill with the New York State Legislature which will require landlords to apply security deposits to rent – a truly unprecedented move – one which is likely to stir some controversy with landlords. Such sweeping legislation will likely face constitutional challenges and other significant litigation, while the nation clamors for answers, relief, and a roadmap of what lay ahead.
Farber Schneider Ferrari LLP is keeping abreast of developments in this arena, will communicate changes impacting business owners and is prepared to answer any of your questions on this topic, on a case by case basis of course, since no two leases are exactly alike.
Communication and Proactivity
Whether short or long term, COVID-19 will continue to impact how business owners operate and try to survive in a very uncertain climate.
Central to avoiding litigation with your landlord is open communication and an understanding of the law as it applies to your lease and other business obligations. Farber Schneider Ferrari LLP always recommends regular business planning and maintaining open lines of communication between landlords and tenants.
Landlords, who are facing considerable uncertainty themselves with lending and finance costs, may be in a position to make reasonable accommodation but as the old adage goes “the squeaky wheel gets the grease.” Do not simply withhold rent expecting a reprieve later. From the landlord’s perspective, they will be loath to open the door to modifying or renegotiating lease terms; however it would be myopic to refuse discussions and attempt to hold tenants in default risking long-term vacancy loss.
If you have the intention to invoke any lease clause, good-guy guaranty, or other drastic measures like vacating the premises, be sure you adhere to all lease provisions—including the provision of notice and the proper dispatch of same (mailing, UPS or otherwise)—and ensure you have trusted legal counsel managing communications with your landlord, to properly preserve the record. As with all written correspondence, one should always expect that those may end up attached as an exhibit to a court pleading– if you are unsure as to how to articulate your business’ position or unique circumstances, seek the advice of experienced attorneys.
If you have any questions on business planning and the impact of the COVID-19 pandemic on your business, please contact Michael Farber, Daniel Schneider, or Michael Ferrari of Farber Schneider Ferrari LLP or visit our website. We offer comprehensive legal solutions for your New York City business establishment and will always be in your corner.