Rough seas lie ahead for commercial tenants and landlords. With no end in sight to the COVID-19 pandemic, litigation over commercial real property leases is ramping up — especially in the restaurant and retail spaces. While the Payroll Protection Program stemmed the tide briefly, government aid is ending while lease obligations remain. Proactive steps by both sides are the best path forward, as court dockets are likely to be flooded with these cases in short order.
The primary question in these disputes is, and will continue to be, whether the COVID-19 pandemic constitutes an intervening event that alleviates a tenant’s rental obligations. This battle has thus far primarily been waged in the restaurant space, where emergency orders across the country have shuttered dine-in restaurant services, reducing profits substantially. If shelter-at-home orders remain in effect or are reinstated in the coming fall and winter months, it is likely that retailers will soon be making similar arguments, though slightly more attenuated.
As always, the question for the courts is one of contract interpretation. Each lease is unique, and no one-size-fits-all solution can be imposed. If a lease includes a force majeure provision providing for rent relief in the event of “governmental action” (or similar verbiage), tenants may have a stronger argument for rent abatement.
Take, for example, the lease in In re Hitz Restaurant Group, No. 20-B-05012, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020). In Hitz, the lease provided that
Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, orders of government. . . . Lack of money shall not be grounds for Force Majeure.
This issue was before the Court after the debtor’s landlord sought enforcement of postpetition rent payments under section 365(d)(3) of the Bankruptcy Code and for modification of the stay. The Hitz court determined that the State of Illinois’s state-ordered suspension of dine-in services constituted “governmental action” or an “order of government” under the lease and held that the debtor was relieved from rent obligations during the pendency of the dine-in suspension.
Not every lease, however, has such a strong force majeure provision. If the lease at question does not expressly anticipate pandemics, governmental action, or other analogous situations, the force majeure provision may not apply. Additionally, many force majeure provisions expressly state that such provisions do not affect the obligation to timely pay rent. Where the Hitz provision was tenant-friendly, many such provisions are not.
If you find yourself on either side of one of these cases, the relative strength of your case will rise and fall with the language of the lease. If you are a tenant with a landlord-friendly lease, it is likely the best practice to continue to pay rent and reserve your right to challenge the validity of such payments. If you choose to simply withhold rent, you are likely inviting a lawsuit for breach of contract and will be on the defense. On the other hand, if you are a landlord facing a non-paying tenant with a tenant-friendly force majeure provision, it may be beneficial to both sides to come to an abatement agreement. It will be more cost-effective to ensure some payment on the back-end, or reduced rent for some period of time, than to expend resources in litigation where the tenant could be absolved of all rent obligations during the pandemic.
Regardless of which side you represent, if you work in the commercial real estate space, this is going to be an issue moving forward. To the extent the parties can work together on the front end to avoid litigation, that will likely be the best-case scenario for all sides. If, however, litigation is the only path forward, knowing how your particular lease affects the playing field will be critical both in developing strategy and in moving forward with the case.