In the face of the COVID-19 outbreak, landlords and tenants may have questions about their existing leasing arrangements. This briefing note is intended to provide a general outline of some of the key issues that may apply to landlords and tenants in these circumstances.
PAYMENT OF RENT
The first thing that tenants may be wondering about is how they will pay their rent, especially if their businesses are required to shut down. Likewise, landlords may be worried about their tenants ability to pay rent.
Tenants should review the default provisions in their leases to see when a default is triggered for lack of payment of rent. The landlord may have the ability to terminate a lease as soon as a rent payment is missed, or the landlord may be required to give notice of a missed rent payment and provide the tenant with an opportunity to remedy the default (usually within 5 to 10 days) before they can proceed to terminate the lease.
Landlords should consider whether they are going to enforce the default provisions of their leases, bearing in mind that there may be significant costs associated with terminating a lease and that there may be lack of demand when trying to find replacement tenants.
Most commercial leases will contain an obligation on a tenant to continuously occupy and operate their businesses, as landlords typically want to avoid having vacant premises on their properties. Typically, tenants will only be permitted to close for business for a certain number of consecutive days, although there may be exceptions for events beyond the tenants control.
Tenants should review their leases to determine whether there is a risk that they will be in breach of their continuous occupation covenants. Landlords should consider whether it is sensible or even possible to enforce these obligations, bearing in mind that certain tenants may have been mandated to close by governmental authorities.
Tenants and landlords should review their leases to determine whether they contain a force majeure clause. A force majeure clause may allow a party to be released from its obligations under a contract due to unforeseen events. The clause will often use language that defines what will or will not constitute a force majeure event, and may also set out which obligations are released and which obligations remain in force. For example, a force majeure clause may relieve a tenant of its obligations to make repairs, but might not relieve a tenant from its obligation to pay rent.
For more information about Force Majeure please refer to the Force Majeure, Frustration, Cancellation, Material Adverse Change article.
Tenants and landlords are encouraged to have discussions about the impact of COVID-19 on their businesses, to see how they might both be able to weather the storm. Landlords should keep in mind that their tenants may be required to drastically reduce, or suspend, their business operations, and that demand for premises from new tenants may be shrinking. Tenants should keep in mind that, like them, landlords need to find a way to cover their own expenses (mortgage payments, property taxes, maintenance and administrative costs) and are likely experiencing similar issues of having to lay off their employees. Tenants and landlords should try to work cooperatively to try to navigate these challenges.
Please do not hesitate to contact your relationship partner or lawyer if you have any questions or if we can be of assistance in guiding you through these new challenges.
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This article represents general information and is not legal advice. Please contact us if you would like legal advice that is tailored to your particular circumstances. We would be happy to help.