Commercial leases, like many other contracts, certainly will be the subject of legal disputes arising out of the COVID-19 pandemic. Although the merits of these claims will be dependent on the applicable lease terms and facts at hand, there are several common themes that are important to consider. Listed below are a few of such potential claims that may be asserted by tenants and the key factors for each that property owners should be thinking about.
- Covenant of Quiet Enjoyment/Constructive Eviction: Tenants potentially could assert claims for constructive eviction if they are denied access to their premises by reason of a “shelter-in-place” or similar order issued by a federal, state or local government. These claims seem unlikely to succeed however, under leases that generally place the onus of complying with all laws, order and regulations on the tenant. In addition, tenants could assert claims for constructive eviction if a landlord fails to provide services required under the lease (including, for example, providing security personnel or other customary services that may not be available to a landlord). Most leases include protective provisions that generally require tenants to continue paying rent notwithstanding a force majeure event that causes a landlord to be unable to provide services, which should provide landlords with a defense to these claims. Importantly, however, such force majeure clauses generally are narrowly construed. As such, the scope of what is defined within any force majeure clause will be important in evaluating the strength of this defense. For instance, a landlord that is unable to procure services due to shortages or unavailability of materials or labor, or as a direct result of a governmental order, would have a stronger defense than a landlord that unilaterally decides to suspend services due to its own, prospective determination that such suspension is necessary to protect the health of its employees. Similarly, whether a force majeure clause includes specific references to concepts like “disease,” “acts of God” or “governmental action” will be important in determining the provision’s applicability in this context.
- Landlord Indemnity: Indemnification obligations in commercial leases typically are limited to landlord’s acts constituting gross negligence and willful misconduct. Although this generally presents a high bar, claims may be asserted where, for example, a landlord does not disclose to tenants the presence of COVID-19 infections among occupants and building employees, or otherwise fails to ensure that infected employees stay home from work. These claims could prove successful, particularly to the degree it becomes common practice in the industry to disclose such occurrences.
- Landlord Work Obligations: The inability for landlords to deliver premises or perform work by specified deadlines under a lease typically gives rise to tenant termination or rent abatement rights. These obligations often are subject to force majeure extensions (however, such extensions typically are capped at a certain number of days, which certainly could be exceeded due to COVID-19). Like force majeure in the context of a constructive eviction, the merits of these claims will depend on a careful analysis of the force majeure definition as it relates to the facts on the ground. Similarly, while not yet tested in the courts, landlords may seek to obtain “status quo” injunctive relief that would provide parties additional time to perform obligations like maintenance, repair or delivery of a premises.
- Cleaning Obligations: Office leases often require a landlord to provide tenants with cleaning services. If these services are discontinued (particularly if tenants are not notified), a landlord could potentially be subject to claims for resultant COVID-19 infections.
- Frustration of Purpose: As more thoroughly detailed in our previous client alert, tenants could potentially assert defenses against paying rent under the doctrines of frustration of purpose by asserting that a change in circumstances (i.e., COVID-19 or a related governmental order) renders landlord’s performance (i.e., providing the leased premises) worthless to tenant. Although common law on this doctrine varies from jurisdiction to jurisdiction, generally the frustration must be so complete that it would be unfair to enforce the terms of the contract. The Second Circuit, for example, limits the doctrine to “virtually cataclysmic, wholly unforeseeable events.” In the case of a tenant not being allowed to use its premises for limited periods of time (less than the full lease term) but still retaining the premises as a business address or for storage if its property, this high bar likely will not be met.
- Temporary Takings: Tenants could argue that any governmental action requiring businesses to close temporarily or to drastically curtail their hours or conditions of operation in order to prevent the rapid spread of COVID-19 effectively converts leased spaces for “public use,” thereby causing a “temporary taking.” Although such action may give rise to tenant claim against the governmental entity, most leases make clear that all or most of the recovery under such a claim would go to the landlord (or perhaps state that the tenant relinquished its right to assert such a claim directly under the lease). However, leases often provide that such a “temporary taking” would entitle the tenant to a rent abatement for the duration of the taking, and in some cases may give a tenant the option to terminate a lease if the taking lasts beyond a certain number of days. This theory is untested and would, of course, shift the burden to the landlord to pursue its own takings claims against the governmental entity.
- Other Landlord Considerations: Finally, landlords should be aware that any inability to collect rent may be covered by their Rent Loss Insurance policy. Such claims will be dependent on the terms of the policy and relevant facts. For further discussion on this subject, please see our prior client alert summarizing the first claim filed over coverage for COVID-19 business interruption losses.