March 17, 2020

How COVID-19 Can Impact Commercial Leases

Both commercial tenants and landlords, especially in the retail, restaurant and hospitality industries, are facing uncharted territory in the wake of the COVID-19 outbreak in the United States. Supply chain issues, limits on occupancy levels and even business closures ordered by local and state governments are creating an unprecedented level of uncertainty over lease obligations.

Virtually every lease has a provision – often referred to as a force majeure or “Act of God” clause – that deals with unexpected and reasonably unforeseeable situations that could affect either tenants’ or landlords’ ability to meet their obligations. But does your lease’s force majeure clause apply to COVID-19? Does it relieve you of any rent payments or continuous operation requirements?

These are some of the primary lease issues facing tenants or landlords (or both):

  • The COVID-19 outbreak, and the resulting impact on business, is likely covered by most standard commercial leases’ force majeure clause, even if it doesn’t specifically state whether a “pandemic” or “widespread disease” would apply. The key to any clause’s applicability usually lies in the nature of the triggering events being within either the landlord’s or tenant’s reasonable control.
  • If either party intends to invoke the force majeure clause in a lease, there may be a requirement to provide notice. Check your terms.
  • Most force majeure clauses provide additional time for one party to perform its obligations but do not usually excuse a party from performance. This may affect a variety of issues, especially timing on delivery of space, construction and compliance with continuous operation clauses.
  • Rent obligations are often not covered under a lease’s force majeure clause, usually because of additional language or a provision in the lease that requires rent payment despite any other provision that would excuse it.
  • If you have business interruption insurance, you should check if events related to COVID-19 are covered. Most business interruption insurance is triggered by damage or destruction of property, but some policies also can cover actions by civil authorities.

Bottom line, the COVID-19 outbreak is having a considerable economic impact on both commercial tenants and landlords. Commercial leases ordinarily can be complicated to navigate; applicability and invocation of a force majeure clause only adds to the complications.

We suggest that if you have questions about your lease or before you engage in any significant deviations from your lease obligations, please feel free to contact one of the members of our Real Estate Practice or visit our Coronavirus/COVID-19 Resources page.