An attorney I know sent this to me anonymously. Clearly not legal advice, but wise words. — Patrick
If you’re a commercial lease stakeholder, whether a landlord or tenant. You’re also navigating personal circumstances, trying to use sanitizer, stay away from crowds, wash your hands frequently – in other words, you’re using your head to avoid the worst outcomes.
So it is with the lease relationship. You’ve got to keep your wits about you. That means if you’re a tenant, you shouldn’t be calling me to ask how to break your lease and walk away with impunity from the obligations you’ve signed onto. Similarly, it means if you’re a landlord, you shouldn’t be lining up a locksmith to “functionally evict” your tenants who don’t pay rent and CAMS in full on the first or 15th of next month, whenever the next payment comes due.
This is my immediate advice: Keep calm and start thinking constructively. Until this moment, the counter-party to your lease was a valued ally of sorts – correct? Don’t turn that counter-party into Lucifer if you get a call requesting some consideration of some kind on performing the lease over the next few months. A couple of specific suggestions:
One, call your insurance agent about the scope of your coverage. Some of you may have business interruption insurance or loss of rents coverages. The former tends to be for tenants, while the latter is essentially for landlords. Business interruption insurance is intended to cover losses resulting from interruptions to a business’s operations, and generally covers lost revenue, fixed expenses such as rent and utility, or expenses from operating from a temporary location. While these policies most frequently relate to physical property damage, businesses should nevertheless assess their coverage to determine whether they might be covered for losses due to business interruptions resulting from COVID-19. Several businesses recouped losses through business interruption insurance for various operational disruptions after the global outbreak of Severe Acute Respiratory Syndrome (SARS) in 2002- 2003. In response to that payout, however, many insurers now exclude viral or bacterial outbreaks from standard business interruption policies. There’s nothing you can do about the eventuality that outbreaks may be excluded. It’s just a good idea to know where you stand.
Two, if you’re a landlord, call your tenants. Find out how they’re doing. Tell them, especially restaurants, yoga studios and other gathering places, and retail shops, that you’re rooting for them. Right now they’re scared out of their wits. If you’re a tenant, call your landlord. Let them know how you’re doing – but don’t lie to the landlord, give it to the landlord straight. BUT THE MESSAGE IS, KEEP COMMUNICATING. Don’t go dark on your lease counter-party, because that leads directly to an atmosphere of suspicion and distrust.
Third, if you’re a landlord or a tenant, begin thinking about contingencies. Landlords may want to begin thinking about what their cash flow requirements are from a project, and how to remodel their rent stream projections to account for the possibility that some tenant business models are cratering with no idea when those models will be restored, if ever. Tenants in the consumer product and service businesses will also need to think about their cash flow requirements and how their rent is going to be paid – at least in part. After 36 years of law practice, I can promise Tenants one thing – hunkering down and declining to pay Landlords any of the rent or CAMs due is the worst possible strategy for remaining in business in their premises, with a single exception. The exception is if you’re failing and intend to file for bankruptcy anyway. Otherwise, you’ve got to come to grips with the fact that ongoing bills facing the Landlord have to be paid, at least in part. So, stopping rent payments altogether causes a Landlord to make difficult choices that seldom resolve well for Tenants. The two sides need to figure out how to keep the Tenant open and get cash into the Landlord’s hands so the Landlord can keep the property open and in decent and safe condition.
After you understand what your cash flow needs are and how to come closest to achieving them, then you need to begin talking to your lease counter-party(ies) to discuss how and when the lease’s financial obligations will be met. And the landlord’s obligations, like those to maintain and repair the premises, also. Landlords may face the inevitable call to their lenders, to keep them informed, too.
There’s a buzz on the Internet that the so called force majeure clause in a commercial lease gives a tenant a “get out of jail free” card. That isn’t true, for reasons that I can go into with you individually. Tenants should not rely on that lease provision, if one exists, unless the applicable clause specifies that pandemic/epidemic events are force majeure events that trigger the Tenant’s right to cease performing under the lease. There are other common law legal theories that actually have more chance of success for Tenants, but again, that’s for individual consultations. And think about this for just a second. How much advice and representation will I want to provide you, whether you’re a landlord or tenant, knowing (as you may be tempted to advise me) that you’d like to use a fragment of lease language to stiff your contract counter-party? Am I next in line for such treatment?
It’s going to get tougher out there in the next few weeks, but be thoughtful and communicate. A bit of empathy for our fellow citizens will go a long way, too.
I’m rooting for each of you. And stay safe, you and your families, as best you know how.
— Anonymous Attorney