COVID-19 and Lease Obligations

March 31, 2020

Rent Abatement Requests

In light of the COVID-19 pandemic, tenants are looking closely at leases to see if any relief can be found or what defenses a landlord may have for the nonpayment of rent.  Despite statewide, county or municipal orders that may restrict operations at leased premises, leases remain enforceable contracts.  Generally speaking, both landlords and tenants are obligated to comply with lease terms by maintaining the property and paying rent.  The reality is that most leases are favorable to the landlord, and therefore will not protect a tenant for closures as a result of the coronavirus pandemic. The widespread impact of the virus on business activity, however, has led to numerous requests by tenants to seek some rent relief from landlords, at least for a limited period of time.

So far, most landlord clients are simply waiting out these requests for now.  In response to requests from tenants to defer or abate rent, landlords are generally responding by saying nonpayment of rent is a breach of the lease, but landlords are going to delay pursuing any remedies (without waiving same) until better information is available.  Once “shelter in place” and similar orders end so that tenants can resume operations, tenants will need a ramp-up period.  Landlords can expect rent concession requests until at least the end of the year.  Likely this will result in a process of negotiation on a lease-by -lease basis, and the extent of relief offered will depend on the nature of the Tenant’s business and the extent the tenant’s business and finances have been damaged by the shut-down.  Note that many commercial loan agreements will not permit lease amendments without the lender’s consent.

Potentially Applicable Lease Provisions

Force Majeure Provisions

Of the potentially applicable lease provisions that may excuse a tenant’s performance under a lease, force majeure is most often cited.  Force majeure clauses provide parties with some relief if they are unable to perform their obligations due to certain events, which are often specified to include acts of God, strikes, government actions or other causes outside the reasonable control of the parties. Landlords and tenants should review their force majeure provisions carefully to determine whether emergency measures taken in response to COVID-19 may excuse or delay performance. However, force majeure clauses generally favor landlords (such as in the event of a force majeure event affecting the delivery of tenant improvements) and if such provisions apply to tenants at all, they typically don’t excuse the payment of rent.  Nonetheless, many tenants are asking for rent abatement for up to 3-4 months, or half rent for the same period. 

Continuous Use/Go Dark/Operating Hour Provisions

If a lease contains required hours of operation or obligations to remain open and operating, tenants should notify landlords if they elect to close in response to government orders or concerns for the safety and health of employees and customers. This is particularly relevant for retail tenants, but may apply to some office or industrial tenants as well.

Quiet Enjoyment Provision

Leases frequently include a covenant of quiet enjoyment, whereby the landlord covenants that the tenant’s use of the premises will not be disturbed provided the tenant has complied with its obligations under the lease. In the event a landlord elects to close the building in which a tenant’s premises are located (absent government intervention), it may be considered a breach of quiet enjoyment. On the other hand, if the building is closed to the public, but the tenant is still permitted to access the building for its own use, the covenant is probably not breached.

Access to Premises and Availability of Services

It must be determined if a landlord has contractually agreed to provide continuous access to the premises. If such a clause exists, are there exceptions to that obligation? Some leases explicitly allow the landlord to close the building or suspend services, utilities or access in the event of an emergency, if the landlord has a reasonable concern of damage to the building or personal injury to the occupants, and, in some instances, as a result of government orders or actions. The interpretation of landlord's obligations and tenant's remedies may differ depending on who elects to close off the access—the government, the landlord or the tenant. 

Business Interruption Insurance

Businesses are looking to their property damage and business interruption insurance policies to see if they will cover any of their losses. These types of insurance, however, do not typically cover losses arising from pandemics and disease based on a standard exclusion present in most policies. Absent an endorsement for losses arising due to bacteria and viruses, these policies may be interpreted as being limited to providing coverage for losses arising from physical damage to a property. Even insurance for civil authority action (covering certain closures due to government orders) may not cover closures due to viruses and bacteria.  Of course, every insurance policy will need to be reviewed to determine if coverage might exist.

Inverse Condemnation

Potentially, tenants may also make claims against the government for inverse condemnation arising from the government orders to close all non-essential businesses and failure to provide just compensation as required by the Fifth Amendment of the Constitution.  However, given the public health emergency that exists, the applicability of this doctrine to the present circumstances is questionable.

Litigation Remedies for Landlords in Georgia

From a litigation perspective, there is currently nothing preventing any dispossessory action from being filed in any court in Georgia.  However, the Georgia Supreme Court’s stay order clearly extends any answer deadline by 30-days if filed during the current stay (as well as any answer deadlines which would have expired between March 13th and April 13th).  While it does not specifically address dispossessory hearings, it appears to have uniformly been interpreted to stay any hearing on a dispossessory proceeding.  Given the current status of most courts, it may be impossible to even get a summons with which to serve a tenant prior to the expiration of the stay order, as well as to get the court to schedule service with the Sheriff’s department. 

As of this writing, the national guidelines for social distancing have been extended through April 30, making it less likely that the court will lift its stay order on April 14. After the extended deadline for a tenant to file an answer, it would then be possible to seek a dispossessory hearing.  At that time, however, it will be necessary to check the status of whatever county the dispossessory is being filed in to determine if that court also has a stay in place, and whether or not that stay has also been lifted or expired.

And of course, when the judicial stay is eventually lifted, there will be a long line of dispossessory actions to work through the system.  Landlords should be prepared for a dispossessory action to take much longer usual.

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