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Commercial lease considerations & other issues in light of COVID-19

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Written by Veronica E. Rossitto
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Important information regarding

This memorandum is being issued in light of recent circumstances concerning COVID-19. These circumstances are constantly changing on a daily basis. The information provided herein is based on the current information known at this time (March 23, 2020).

What is a Force Majeure clause?

A force majeure clause is a provision included in contracts to remove liability for natural or unavoidable catastrophes that interrupt or prevent a party from fulfilling his/her obligations under the contract. There is not one form/standard force majeure clause; that is to say, force majeure clauses vary from one contract to another

Why is this important?

Almost all commercial leases contain a force majeure clause. As a tenant, you may be entitled to invoke your rights under the force majeure clause in your lease if there is a force majeure event that prevents you from performing under the lease, including your ability to pay rent. Bear in mind, however, some landlords carve out a tenant’s obligation to pay rent in the event of a force majeure, meaning some tenants may still be obligated to pay rent even if a force majeure event has occurred.

Can I invoke force majeure now?

It depends on what the language in the force majeure clause says. If you have decided to cut back business hours or elected to take any other action to help prevent the spread of the virus but which, in turn, has resulted in a reduction in cash flow, these acts likely do not constitute a force majeure. This is because financial hardships generally do not qualify as force majeure events. If, on the other hand, your state, local, or municipal government authorities issue a “shelter-inplace” or similar order, or if you have been personally diagnosed with COVID-19 and/or have been ordered by a medical professional to self-quarantine, these situations could constitute a force majeure event depending on what your lease says. Note that the clause may also have steps which may be required to invoke the force majeure clause, such as providing written notice within a certain number of days after the force majeure event occurs.

Should I approach my landlord now?

It is recommended that you approach your landlord sooner rather than later to request a temporary abatement of rent, especially if the force majeure clause in your lease has a carve out for rent payments. A 90-day abatement would be ideal. In return, you as tenant could offer to extend your lease by 3 months (or longer) on the back end, thus creating an incentive for the landlord. Alternatively, you can attempt to negotiate a reduction in the rent amount. If you and your landlord come to an agreement, it is important to memorialize this agreement in writing to protect your legal interests.

What issues could I face in approaching the landlord?

When discussing rent issues with your landlord, be cognizant of what you put in writing. It is important not to imply that you will soon be unable to pay rent or that you plan to stop paying rent, as these statements could be construed as an anticipatory breach on your part. To avoid this potential problem, it is recommended that your initial contact with your landlord be made via phone rather than in writing so that the issues can be discussed verbally.

What other options do I have?

You may also want to consider contacting your insurance carrier to determine what types of coverage you have in relation to business impacts from COVID-19.

Are there any other issues I should be aware of?

A recent Bill was passed that expands employee protections under the Emergency FMLA Expansion Act and establishes a new Emergency Paid Sick Leave Act. The FMLA expansion entitles employees to 12-weeks of job-protected leave, most of which must be paid, to care for the employee’s child whose school is closed or if the childcare provider is unavailable due to public health concerns. Whereas employers with less than 50 employees were previously exempt from the FMLA, simply having fewer than 50 employees does not, on its own, exempt you from complying with this Bill. The Emergency Paid Sick Leave Act applies to all employers with fewer than 500 employees. Employees are entitled to paid sick leave under 6 qualifying circumstances related to COVID19. How much pay an employee is entitled to depends on whether they are part-time or full-time. While there are caps on the amounts required to be paid, it could have a significant impact on small business.
These materials are made available by Stibbs & Co., P.C. for informational purposes only, do not constitute legal or medical advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Stibbs & Co., P.C. The facts and results of each case will vary, and no particular result can be guaranteed.
 

Topic: Real Estate

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