News & Insights
As the world continues to adapt to the ever-changing landscape of the COVID-19 pandemic, commercial real property owners and operators are being forced to seek novel solutions to adjust to this new reality. Like so many legal and business issues, the potential solutions are not one-size-fits-all; rather, the particular details and circumstances of each lease must be carefully considered by the parties. To establish that Landlord acted as a “reasonable and prudent” commercial property owner and operator in this situation there are several principles that commercial landlords should keep in mind when crafting solutions for their leases.
First, it is essential that Landlord effectively communicates with its Tenants throughout the crisis. Landlord should establish a procedure for circulating updates to Tenants. Given the fast pace at which COVID-19 has developed, email communications are likely ideal. Once Landlord has established a notice procedure, then Landlord should send a confirmatory communication to Tenant, requesting a response in which Tenant acknowledges that: (i) email (or other method of communication) is the agreed upon format for communication; and (ii) the email addresses (or physical addresses, phone numbers, etc.,) are correct. Once communication lines have been confirmed, Landlord should circulate a detailed explanation of the status of the Leased Premises. Details to be included in the building status can include the following information, as applicable:
- Explanation of reduced hours and services at the Leased Premises;
- Statement that janitorial service providers are not properly equipped to perform decontamination or extraordinary disinfecting of the Leased Premises;
- Clarification of, and/or amendment to, building access procedures (e.g., how and when Tenant can access the building; whether access is limited via additional access codes or cards; additional security at front desks/lobbies, etc.);
- Reminder that Landlord will comply, at all times, with all Federal, State, and local laws, rules, and regulations relating to access to commercial properties and any other relevant issues;
- Note that the North Carolina Stay-At-Home Executive Order (the “Order”) mandates that non-essential businesses cease all activity at their physical work places except for “Minimum Basic Operations,” while “Essential Businesses and Operations” may continue operating. Landlord should carefully discuss the definition of “Essential Businesses and Operations” with its legal counsel and make a determination as to which Tenants, if any, qualify under the Order’s definition. For more information on the Order, please see previous article by Daniel D. Stratton, posted on March 30, 2020 https://www.tuggleduggins.com/2020/03/north-carolina-statewide-stay-at-home-executive-order-goes-into-effect-today/.
Landlord should provide status updates about the Leased Premises regularly throughout the COVID-19 crisis. Copies of all such notices and updates should be retained by Landlord and/or Landlord’s legal counsel. Second, Landlord should implement an incident report procedure with its management and maintenance teams to respond to any reports of potential exposure on the Leased Premises. Landlord (or Landlord’s agents), should prepare a written report detailing any exposure-related COVID-19 issues, including, but not limited to, names of those involved, when exposure occurred, details of what happened, and the response steps Landlord is taking to disinfect the affected areas on the Leased Premises and properly notify all pertinent parties.
Third, Landlord should conduct a careful review of its commercial general liability insurance policy and the process of submitting claims. Possible exposure incidents should be reported to Landlord’s CGL carrier, along with Landlord’s remedial measures to mitigate the exposure, to see if there are any further measures which insurer wishes Landlord to take. Landlord should also review its insurance policies to see if Landlord has business interruption insurance coverage. Landlord should have its legal counsel review this policy in order to make this determination, as well as fully review the policy/policies. It is uncertain how courts will interpret COVID-19 social distancing mandates and governmental shut downs of private property as potential casualty events under insurance policies.
Fourth, Landlord must be prepared to protect its rights under the lease in the event that Tenant notifies Landlord that Tenant will not be paying rent for the foreseeable future. If Landlord receives a notice to this effect from Tenant, then Landlord should respond, including the following information:
- Rejection of Tenant’s claim that Tenant does not have to pay rent;
- Statement of the legal basis for Landlord’s rejection (e.g., impossibility of performance/frustration of purpose and force majeure do not excuse payment of rent under the lease – Landlord should have its legal counsel review the terms of the lease to make this determination); and
- Specific statement that Landlord is not waiving any of its rights and remedies under the Lease, at law or in equity.
Fifth, notwithstanding the foregoing, Landlord should try to determine which Tenants will be economically viable and seek to make the best deal possible with such Tenants, without waiving any of Landlord’s rights and remedies. The way to memorialize such a deal is via a “Defer and Extend” Lease Amendment. Such an Amendment should set forth the following information:
- Specific amount of rent which Landlord will defer;
- Clarification as to whether deferment includes both base rent and additional rent; if Landlord is only deferring base rent, then Amendment should specifically provide that Tenant will continue paying taxes, insurance, and CAM;
- Specific period of time for the deferment – it cannot be open-ended. If necessary, the time period can always be extended. It is better to extend via another Amendment at a later date than to leave the period open-ended, which could render the Amendment unenforceable;
- How the deferment will modify the Term of the lease, including:
- Current termination date, so to clarify the exact date on which the extension begins;
- Provision that, for each month of deferment, the Term of the lease will be extended by one calendar month (or whatever ratio on which the parties agree).
- Clarification that any extension or renewal options are not part of the deferred rent extension of the Term and, if exercised by Tenant, any extension or renewal term would begin after the deferred rent extension period;
- No waiver clause (Landlord is not waiving any rights and remedies under the Lease, at law or in equity);
- Estoppel clause where Tenant acknowledges that Landlord is not in default of the Lease as of the date of the Amendment.
Although the COVID-19 crisis is unprecedented in its magnitude, as well as its speed of progression, Landlords must not forgo formal lease amendments for the sake of expediency. The changes outlined above affect material provisions of the lease and, therefore, must be in writing to comply with the statute of frauds.
As Landlords try to assess their potential losses resulting from COVID-19 and how to navigate the resulting landscape, much remains uncertain. However, this uncertainty is not faced by Landlords alone, but by every participant in the economy, which is to say, by everyone. Accordingly, the solutions to the COVID-19 crisis will continue to evolve, being shaped by many factors.
© 2020 Tuggle Duggins P.A. All Rights Reserved. The purpose of this bulletin is to provide a general summary of significant legal developments. It is not intended to constitute legal advice or a recommended course of action in any given situation. It is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature. Moreover, information contained in this bulletin may have changed subsequent to its publication. This bulletin does not create an attorney-client relationship between Tuggle Duggins P.A. and the recipient. Therefore, please consult legal counsel before making any decisions or taking any action concerning the issues discussed herein.