If you are a commercial landlord or tenant, you are no doubt reeling from the rapid and still unfolding impacts to your business caused by the Covid-19 public health crisis.
In the latest development, on April 3, 2020, El Dorado County Superior Court Judge Suzanne Kingsbury issued an order , vacating all pending commercial eviction trials through May 29, 2020 and ordered that the trials will not be reset until a date after May 31, 2020.
The order, however, specified that it does not relieve a commercial tenant of the obligation to pay rent, nor restrict a landlord's ability to recover rent due. That’s because in most leases, the duty to pay rent remains regardless of the circumstances.
In these difficult times, many landlords and tenants alike may be facing hard choices in the days ahead. Taking steps now to become fully informed can help alleviate problems later.
First Steps for Landlords & Tenants – Review the Lease
Here are some key points to consider:
1. Force majeure clause.
A force majeure clause is one that refers to unforeseeable circumstances that prevent someone from fulfilling a contract. A force majeure clause may apply to extend the time for a party to perform under the contract, or terminate their obligation to perform altogether. Although one might think that a global pandemic would be an unforeseen circumstance that would prevent a person from fulfilling a contact, these clauses usually do not apply to financial obligations. If such a clause is applicable, there may be a need to send out notices to assert the rights detailed in the clause. A detailed review of the provision by an attorney is likely necessary to determine how it applies to your situation.
2. Rent clauses.
In most leases, the duty to pay rent is an independent covenant, which means that the rent is due even if the premises are closed or the landlord reduces services. However, some leases may have clauses that include rent abatements for certain circumstances, such as closure of the building or common areas, or if the landlord cannot provide services. Notices may also be required to trigger these provisions.
3. Security deposits.
Review the amount and type of security deposit, and when, whether and how it can be applied to arrears.
4. Insurance policies.
Review policies to see if there any provisions that might be applicable to Covid-19-related losses and put the insurer on notice if there is any possibility of a claim.
5. Lease deadlines
Review all lease deadlines, including the time frames for lease expiration, options for renewal, construction and audit right deadlines.
6. Special issues for retail and restaurant tenants.
Retail and restaurant leases may contain clauses that specify the operating hours of the business, or whether the tenant can close or pay reduce rent if certain major tenants, or if a certain percentage of tenants are closed. There may be limits on permitted uses or ones giving the landlord lien rights on the tenant’s personal property and equipment.
The lease provisions may also be impacted by applicable state laws, and the advice of an attorney can be helpful so that all the risks and liabilities can be evaluated thoroughly.
Next Steps Tenants Can Take
In addition to gaining a thorough understanding of the lease terms, tenants should document all the dates and impacts of orders or regulations on their business, the additional expenses they are incurring and all efforts to perform under the lease and decrease their losses. An informed tenant then will be in a good position to:
Adjust the lease terms for either the duration of the Covid-19 pandemic or for the duration of the lease, or to potentially defer payments for an agreed-upon period;
Deal with any issues related to such items as changes in hours of operation or the nature of the business;
Avoid future disputes.
Next Steps Landlords Can Take
In addition to the lease review, landlords can benefit from confirming their rights under existing loan documents to modify leases, as well as considering:
Negotiating lease changes that will make it possible to retain tenants if possible while still meeting their financial obligations;
Revising any rules and regulations to conform with any required directives from state or local governments concerning the virus;
Evaluating their financial position in regard to the property with an eye to whether operating costs, such as those for cleaning and security or for missed payments due to vacancies, need to be adjusted going forward.
Advice from an attorney as well as an accountant or other financial professional can help in navigating these complex issues during these unprecedented times.
Kevin A. James is a business attorney in Placerville, CA. He helps business owners navigate the complex legal landscape in California with the goal of making his client’s businesses more profitable and simpler to operate. He can be reached at kjames@bncj-law.com or (530) 295-6400.
Learn more: Watch Kevin James's webinar on Responding to COVID-19: Navigating Employment and Contractual Issues to Minimize Disruption to Your Business.
Discover: What you need to know about the virus-relief stimulus package by reading Alert: Coronavirus Aid, Relief, and Economic Security (CARES) Act.