Commercial Lease and Rent Obligations - Insights Gleaned from the COVID-19 Crisis
In the wake of the ongoing COVID-19 pandemic, businesses are grappling with unprecedented challenges, particularly in the realm of commercial leases. Here, we explore key legal considerations that businesses should be aware of to navigate this complex landscape.
## Legal Considerations and Impacts on Commercial Leases
### Eviction Moratoriums
Eviction moratoriums, such as those implemented by the CDC, have significantly impacted landlords by limiting their ability to collect rent. This has led to legal battles, with landlords seeking compensation for lost income. A recent federal appellate court ruling allows landlords to sue the government for rent missed during the pandemic, under the Constitution's takings clause[1]. However, there is a split among lower courts regarding whether eviction moratoriums constitute a physical taking under the Takings Clause[2].
### Force Majeure Clauses
A force majeure clause in a contract can be crucial for tenants seeking to avoid rent obligations during a pandemic. These clauses excuse one or both parties from performing their obligations when certain unforeseen events occur. However, their applicability depends on the specific wording of the clause and the nature of the event[4]. It's best for businesses to review their contracts, act quickly to invoke force majeure clauses, document all relevant communications, and consult with legal experts[4].
### Rent Relief and Lease Adjustments
The COVID-19 pandemic has prompted changes in commercial lease terms, including more frequent mentions of rent relief and shorter lease periods. Businesses should negotiate lease terms that include provisions for potential future disruptions, such as pandemics or natural disasters, which might involve rent deferment options or flexible lease durations[5].
## Legal Considerations for Businesses
To protect both landlords and tenants, it's crucial to ensure that leases include clear provisions for unforeseen circumstances, such as pandemics. Businesses should consult with legal experts to understand current laws and regulations regarding eviction moratoriums and force majeure clauses. Detailed records of all communications and agreements related to lease adjustments or disputes should be kept.
In the face of the pandemic, many businesses have had to close, with restaurants like The Coco Lounge, Urban Grill, and Carbon permanently shutting their doors on March 28, 2021[6]. Commercial property owners must review rents to competitive rates and invest in technology to support online delivery of services to retain and attract new tenants. The scope of force majeure clauses of commercial leases should be expanded to anticipate future pandemics or events that may bring about business disruptions.
In conclusion, understanding these legal considerations can help businesses better navigate the challenges posed by global pandemics and other unforeseen events. As the pandemic continues to impact businesses in the short to mid-term, despite ongoing vaccination programs, businesses must remain adaptable and proactive in their approach to commercial leases.
[1] https://www.reuters.com/legal/government/landlords-can-sue-us-government-over-rent-missed-during-pandemic-court-2021-04-02/ [2] https://www.npr.org/2021/04/01/981975986/landlords-can-sue-the-cdc-over-eviction-moratorium-federal-court-rules [3] https://www.forbes.com/sites/forbesrealestatecouncil/2020/10/20/force-majeure-clauses-and-covid-19-what-you-need-to-know/?sh=765e31b7434d [4] https://www.forbes.com/sites/forbesrealestatecouncil/2020/10/20/force-majeure-clauses-and-covid-19-what-you-need-to-know/?sh=765e31b7434d [5] https://www.forbes.com/sites/forbesrealestatecouncil/2020/10/20/force-majeure-clauses-and-covid-19-what-you-need-to-know/?sh=765e31b7434d [6] https://www.businessinsider.com/restaurants-closing-permanently-covid-19-pandemic-2021-3
- Businesses evaluating new investments in commercial real estate should consider the impact of eviction moratoriums, like those implemented by the CDC, on their potential income.
- To safeguard their financial losses due to rent relief and lease adjustments, landlords might need to scrutinize the scope of force majeure clauses in their contracts and potentially draft amended clauses that anticipate future pandemics or business disruptions.
- In light of the ongoing COVID-19 pandemic, it's essential for businesses to perform thorough financial analysis, possibly using technology, to assess the feasibility and risks associated with business leases.
- In their efforts to retain and attract new tenants, commercial property owners can consider upgrading their infrastructure, such as implementing technologies for online service delivery and remote work, to remain competitive in the post-pandemic business environment.
