The Tenant’s View of Coronavirus Lease Negotiations
By Joshua Stein May 12, 2020 10:18 am
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Many businesses face a near-total elimination of revenue as a result of shutdowns triggered by the coronavirus pandemic. Few businesses or their principals maintain substantial cash reserves. Thus, businesses suddenly find they cannot pay their rent and have sought relief – a deferral or even total abatement of rent for at least a few months. That’s a negotiation. The outcome depends in part on each side’s perception of its leverage, wants, needs, strengths, weaknesses, and alternatives. To a lesser degree it also depends on what everyone else is doing.
Tenants in trouble would like something more definitive than that. Instead of relying on negotiations, might they have the right to abate or defer rent in today’s pandemic as a result of legal principles or the words of their lease? Tenants’ lawyers have been scouring lease language and landlord-tenant law to try to find opportunities for tenants. It’s not hopeless.
Some leases and legal principles excuse a party from performing its obligations if force majeure, i.e., circumstances beyond that party’s control, intervene. Most leases say that force majeure excuses apply only to obligations other than payment of money. So if a tenant agreed to build out its space by a deadline or host an event on a certain date, the tenant could probably claim force majeure as a defense. But the words of the lease typically negate force majeure as a defense against payment.
Principles of “impracticability,” “impossibility,” “frustration of purpose,” and “mutual mistake” might come into play. In each case, the parties entered into a business relationship on the assumption that certain things would be true and the parties would achieve certain benefits from their agreement. In the case of a lease, the tenant assumed it could occupy the space, do business, and collect revenue from customers. If that turns out not to be true, then the tenant might argue one of the defenses suggested in this paragraph. Whether tenant will prevail may represent an entirely separate discussion. Many leases contain elaborate “no offset” clauses, seeking to snuff out defenses of these types.
Leases often make the owner responsible for environmental issues in the space, sometimes defining environmental issues broadly enough to include biohazards, viruses, and other natural conditions that endanger health. If a tenant’s lease has a broad definition of that type, with the owner responsible for these matters for the entire lease term, then maybe the tenant can argue the owner bears the risk of a viral pandemic. The tenant would claim a right to suspend rent.
Most leases, as well as general legal principles, require the owner to maintain the tenant’s “quiet enjoyment” of the space. If the owner has locked the tenant out of the building or ordered the tenant not to enter, might the tenant be able to argue the owner failed to maintain quiet enjoyment? Perhaps, but it could be an uphill argument because the owner didn’t really do it; the government did. Still, this potential argument may be one reason owners go out of their way to keep their buildings open and operating, even if no tenants go in. It’s also why owners hesitate to lock down any more tightly than the government requires.
Some leases impose on the landlord specific requirements on access and occupancy, potentially giving the tenant some arguments. A lease may require that the tenant will always have access to the leased premises through certain specified pathways and doors, all of which must remain open during business hours. If the owner closes off those pathways and doors, does that give the tenant a defense? Maybe. Again, though, if it’s really the government that interfered with access, the owner would disclaim responsibility.
Mall tenants can often terminate if their sales fall below a certain point, or do the same or switch to percentage rent if the landlord fails to maintain certain other tenants open and operating. These requirements are typically quite intricate and independent of exogenous events. They usually do not support immediate lease termination or rent abatement. They may, however, sometimes allow a tenant to switch fairly quickly to pure percentage rent, which may be just as good.
In most cases, however, tenants face an uphill battle if they want to rely on their leases as a way to avoid paying rent when business has collapsed. They may need to rely on the Legislature, which may find itself constrained by such minor details as the Contracts Clause of the Constitution.
