ALERT: Landlords and Property Managers: Response to Tenant Shutdowns

Lyons Gaddis COVID-19 Alert

This Alert is one in a collection of articles created by Lyons Gaddis in our effort to get important information to our clients regarding the effect of the novel coronavirus (COVID-19) outbreak in the United States.  This Alert focuses on commercial real estate owners and their property managers who are seeing their tenants experience a complete or partial shutdown of their businesses in response to recommended or mandated social distancing measures in the wake of the spreading coronavirus.  Landlords and tenants should review their Lease documents and, if needed, seek legal advice regarding your rights and obligations in your particular situation.

March 23, 2020
ALERT: Landlords and Property Managers: Response to Tenant Shutdowns
by Cameron A. Grant, Shareholder

Landlords and property managers face a new challenge as the impact of COVID-19 and the consequent social distancing practices hit retail and non-retail businesses alike.  Many retailers have shut down operations completely or converted to carry-out or on-line sales.  Office workers are increasingly working from home, leaving large spaces all but vacant.  At the same time, some work continues in these buildings and landlords and property managers must take new steps to adjust to the changing reality. While the landscape is changing rapidly, there are a number of things that property owners and managers should consider immediately:

GENERAL STEPS

• Follow the guidelines of your local health department and the Centers for Disease Control and Prevention (CDC) for the latest on measures to control transmission of the virus.
• Implement frequent cleaning of high-touch surfaces and objects like doors, restrooms, security desk areas, elevators, common kitchens and facilities.
• Provide materials to educate employees, visitors, tenants and vendors who come to your buildings (in multiple languages).
• Install hand sanitizer stations in high-traffic areas.
• Cancel large events in accordance with CDC guidelines.
• Follow Occupational Safety and Health Act (OSHA) requirements, set forth in Sections 13 and 14 of OSHA No. 1 of 2006, which impose various duties on the employer to ensure a safe and healthy work environment
• Communicate with Tenants regarding the steps you are taking to clean and sanitize the property and to learn how they are responding to social distancing measures.
• Communicate with Tenants regarding any changes to lease payment deadlines, CAM charges, or other relief you may offer.
• Consult with counsel about COVID-19 and its impact on your property, lease and other contractual obligations, business operations and potential modifications to each.
• Contact your lender to discuss loan forbearance options that may be available to you.

SPECIFIC ISSUES

Closing/Restricting Access to Premises

Property owners may wish to temporarily close a premises or require a tenant to vacate.  Those owners must carefully evaluate the lease and the specific circumstances.  Closing a building might trigger a Tenant’s claim of breach of quiet enjoyment or possibly even an act of forfeiture. If the premises must be closed based upon government direction, then the landlord will only be enforcing the tenant’s obligation to comply with local, state and federal laws and regulations – a standard requirement in most leases.

In the event of any closure, landlords should document the reasons and communicate with the tenants.  If time permits, consult with your attorney regarding the planned closure and your specific lease and legal obligations.  Depending upon the terms of the lease, landlords may be able to close the common area or restrict access to the building.

Rent and CAM Suspension

With businesses shuttered, most tenants will face a significant cash shortfall and may be unable to make regular rent and CAM payments. Tenants may request a rent suspension during the COVID-19 shut down.  However, most commercial leases only allow such a suspension if the premises are damaged or destroyed by fire, flood, or some other insured risk.  Even a typical force majeure clause in a lease usually does not alter the Tenant’s obligation to pay rent.

Many of our landlord clients are communicating with tenants and offering some sort of rent suspension.  One landlord has offered all tenants a rent deferral until May 1^st.  Another has offered a rent deferral provided that tenants continue to make CAM payments.  The key in this situation is communication.

Loan Forbearance

With Tenants unwilling or unable to pay rent, with courts shut down and evictions on hold, property owners are posed to feel the pinch.  Landlords should immediately contact their lenders to discuss any options for suspending loan payments during this crisis.  Typical commercial loan agreements do not address pandemics and, consequently, any forbearance will require direct negotiation with your lender.  Such agreements should be carefully reviewed with your legal counsel.

Lease Terminations

Tenants my request lease terminations if the COVID-19 shut down seriously impacts their business.  The pandemic is unlikely to trigger a required termination under the terms of most commercial leases.  Our Alert regarding Force Majeure and Commercial Leases [LINK TO SDF ARTICLE] provides a more in-depth discussion of this issue.

Construction Delays

Landlords and tenants in the middle of a building construction or tenant improvement project may experience delays and other challenges resulting from COVID-19.  City building departments will be slower to inspect and approve plans and construction, lenders may be slower to release construction funds and contractors may have challenges finding laborers or supplies.  Further, landlords may need to consider contract milestones in leases and construction agreements which may trigger a liquidated damages clause or other contractual remedies.

Commercial landlords and tenants alike should review their lease documents and, if necessary, seek legal advice to determine their rights and obligations based on the particular circumstances of the suspension in use of the space. Please note this Alert is not intended to apply to properties containing residential leases. We will be providing a separate analysis of the ramifications of the COVID-19 pandemic with respect to both construction agreements and financing documents for real property.

Attorneys in the Real Estate Group at Lyons Gaddis are available to advise you in relation to these loan programs and other COVID-19 related matters impacting your current and future business operations.