Impact of Coronavirus on Commercial Leases

Introduction

Governments across the world are implementing several policies and strategies to ensure that the coronavirus pandemic settles down. This pandemic is different because it comes in the middle of an economic crisis. So, even if we come out of this pandemic relatively safe, we still have an economic crisis to deal with after the pandemic.

In times like these, the most important question is understanding how companies’ commercial leases will be affected. The federal government has passed a coronavirus bill that seeks to implement policies that help people deal with the economic downturn during the crisis. Some provisions in that bill seek to protect employees and tenants. So, here are some ways that your commercial lease will be affected by the Coronavirus

Moratorium on Rent

The question of whether the landlords can ask for rent during these turbulent times is a common one. There is no federal compulsion that the landlords would waive any rent due during this period. Section 82 of the new Coronavirus bill 2020 only protects tenants against forfeiture of the property.(1) The section is applicable even if an order for possession has been passed. No landlord can forfeit property from the date of the law till 30th June 2020.

No provision of this law deems to act as a waiver for the tenants. The landlord could still insist that you pay rent. If you refuse to pay the rent, you’re equipping your landlord to file a petition against you in the court of law. While he can’t forfeit your property, he can ask for the seizure of your goods to pay the rent. In that case, you’d be stuck spending your financial resources on legal battles.

What you can do is talk to your landlord and offer alternative payment plans. By doing this, you’re not refusing to pay the rent. You’re only offering a different payment plan. Courts can take cognizance of the matter and refuse the landlord’s petition for forfeiture or seizure of your goods. If the landlord does offer you a moratorium, it is done only temporarily, and any rents due during the moratorium will become effective once the lockdown is lifted.

Practically speaking, landlords would not jump to such hasty decisions because it can get difficult to find new tenants during and immediately after the lockdown. It’ll not be easy to fill the void. At least this way, you’ll accrue them rent. Some payment plans that you can discuss with your landlord are

• Some clients insist that they’ll pay the rent on a month-by-month basis. This is one form of mitigation. While the landlord has no legal ground to reject it, you need to take advice on whether it is okay with your manager
• Convert all quarterly payments into monthly payments
• Moratorium on the rental payments for 3-6 months
• If the landlord doesn’t agree to that, then ask that the rental payments will be spread over the next six months
• Reduction in rent amount or rate
• Conversion into a turnover basis

Landlords and tenants must recognize that to cooperate would make the most commercial sense. Market intelligence seems to be that most retail and restaurant companies ask for at least one of the above from their landlords, and some are aggressively refusing to pay rent. Whether anyone can read into that that landlords will not refuse or won’t act against “the herd” is a commercial decision for each tenant.

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Staying Open

Most commercial rental agreements won’t have a force majeure clause to call the rental agreement void. Even if it is included, it is unlikely that you’ll be able to call the agreement off because of the force majeure. An argument saying that the client is still working from the building could be brought up if the question of force majeure comes up.

Unless a statutory order comes, landlords can’t close the property. Most retail and leisure operators have been asked to close, but for those that haven’t, this point applies. Those properties could only decide to close when remaining open is either costlier or detrimental to the health and safety of the employees. This decision is something that the tenants have to make for themselves. Unless ordered by state or federal bodies, landlords can’t take that decision of closing. This is because it violates the right of the tenants to enjoy their property quietly and peacefully.

[ Read: Commercialization Agreement ]

If everyone is closing, the landlords and the tenants could agree and use force majeure clause to terminate the agreement. However, if the employee wants to close, but the landlord wants it open, but the tenant is unwilling, it could create a problem. At best, landlords can seek damages for not remaining open during this time. To avoid this, some agreements contain a provision that seeks to penalize the tenant for closure if the ‘keep open’ provision is valid at that time. However, most agree that the courts won’t penalize the parties if the closure is for the health and safety of the employees. This fact is also supported by the supposition that the government enforces the closure.

If you don’t have a lease event such as a break date or lease expiry, you will not be able to terminate your lease. A lease cannot be said to be “frustrated” as a result of the outbreak of Covid-19 and so at an end in these circumstances, and it is highly unlikely a lease contains a force majeure clause permitting termination.

Conclusion

If you’re trying to enter into new contracts during this time or you want to renew your contracts, you need to modify it considering how the situations are.