PUBLISHED 4/9/2020
Prepared by Michigan Community Resources with pro bono assistance from Dykema attorney Kyle Hauberg
The COVID-19 pandemic is having a broad impact on the U.S. real estate industry, particularly on the relationships between landlords and tenants. There are legal issues that nonprofit and small business tenants should be aware of, along with the understanding that the circumstances of this pandemic are unprecedented and the government response and relief efforts are evolving.
The keys to getting through this challenging time will be a close review of the lease, an awareness of government response and directives, and proactive communication between tenants and landlords.
LEGAL ISSUES
In order to better understand impending risks, both landlords and tenants should review their leases and insurance policies. A sampling of leasing issues arising during the COVID-19 pandemic is set forth below.
DISCLOSING COVID-19 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.
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.
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.
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.
COMMUNICATION
PROACTIVE COMMUNICATION
The uncertainty, widespread economic issues, and serious health and safety issues associated with COVID-19 all contribute to the importance of proactive communication between landlords and tenants. It may not be the time to renegotiate an existing lease; however, it is advisable to discuss mutually agreed upon temporary changes to account for the uncertainty and economic damage created by COVID-19. Because there is a need to resolve immediate burdens placed on both sides (e.g. tenants’ need for monetary relief and nonprofit/small business survival; and landlords’ need to avoid tenant defaults and vacancies), non-adversarial solutions must be considered and negotiated where possible. Because the pandemic has widespread impact to both landlords and tenants, negotiated solutions should consider allocating losses and other concerns across all parties.
NEGOTIATING PRACTICAL SOLUTIONS
Some areas to consider negotiating are increases in cleaning services provided; rent reduction or suspension; changes to building access or operating hours; reapplication of security deposit; or a rent holiday with reapplication to future payments. One 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, tenants should keep in mind that a landlord’s willingness to grant rent deferral will depend on many factors, including whether the tenant’s business is damaged or forced to close due to COVID-19 or a government mandate arising therefrom, prior relationships, creditworthiness of the tenant, and whether the landlord’s mortgage lender is willing to grant mortgage payment deferral to the landlord.
RELIEF RESOURCES
Nonprofits and small businesses should continue to monitor emergency relief and alternative funding sources. The landscape and programs are shifting daily as the crisis unfolds. Please note if proceeding with loan programs under the CARES Act that there are limitations on proceeds of the Payroll Protection Program (PPP) that can be used on rent or mortgage in order to qualify for loan forgiveness. [1]
[1] PPP Loan Usage: Loan funds can be used to cover payroll, including health insurance costs and other payroll-related costs, rent, mortgage interest, utilities, and interest on debt taken out before February 15, 2020. These funds are to cover expenses incurred during the first 8 weeks after the loan originates. Note that federal payroll taxes are specifically excluded, and thus the loan cannot be used to pay FICA or federal income taxes, and at least 75% of the loan amount must be used for payroll expenses.
CONTACT US:
Michigan Community Resources is continuing to offer trusted guidance for nonprofit organizations during this time. Please contact the MCR Legal Team at 313.962.3171 ext. 101 or legal@mi-community.org.
As part of our service to our clients, Michigan Community Resources regularly compiles and shares short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Your comments are always welcome.
Please note: These resources have been prepared by Michigan Community Resources with assistance from pro bono attorneys throughout Michigan as information only and does not constitute legal advice. This information is not intended to create and receipt of the information does not constitute a client-lawyer relationship.