Commercial Lease Considerations During COVID-19

Many states have declared a state of emergency, and localities are facing their own struggles. For example, portions of New Rochelle, New York is a containment zone and Teaneck, New Jersey’s mayor has asked the town of 40,000 residents to self-quarantine. On the eve of publishing this alert, Pennsylvania’s Governor Tom Wolf ordered drastic closures in 5 counties. It appears this is the beginning.

While commercial landlords and their tenants are rightly anxious about impacts to their businesses, the COVID-19 response requires them to review and understand their various lease obligations. Commercial lease relationships are complex, and considering current and unavoidable circumstances, there are three paramount issues:

Language. The terms of the lease are essential and require that any discussion begin with a review of the lease.

Communication. All leases have notice provisions that should be strictly adhered to when possible. Beyond “notice” issues, communication is critical in empowering parties to make business decisions. The opposite is also true, as the lack of communication or surprise is fertile ground for disputes.

Reasonableness. Disputes invariably end up before a fact finder—whether it be judge, jury, or arbitrator. While many contractual provisions are interpreted with reasonableness in mind, unreasonable behavior may taint even the most correct legal position before a fact finder.

With these in mind, parties should be mindful how COVID-19 and COVID-19 containment efforts impact their commercial lease.

Quiet Enjoyment. Where a landlord chooses to temporarily close its premises, such action should be based on guidance from a government agency to avoid breaching the covenant of quiet enjoyment (whether implied or expressly provided for in the lease). The landlord should assess whether any provisions in the lease provide a defense for its closure, including, but not limited to, standard provisions regarding a tenant’s obligations to comply with statutes, notices, and orders of competent authorities. Since most quiet enjoyment clauses also contain a carve-out for “lawful interruption,” a landlord should base its actions on guidance from government or regulatory authorities and/or preventative measures mandated by state or local health and safety agencies/officials. Failing to do so may unnecessarily subject a landlord to potential client claims based on its interference with the tenant’s use of the premises.

Continuing Operations. Operating covenants are commonly found in commercial leases and compel tenants to operate efficiently and profitably by conducting regular business during the term of the lease. As above, because most commercial leases contain an obligation to comply with statutes and orders issued by governmental authorities, the tenant would be in breach of its obligations by failing to comply with any health or safety orders relating to COVID-19. Such obligations are likely to outweigh any continuous-operations clause in the lease, though the landlord may be able to avoid rent reductions (or rent suspension) by arguing the business can continue its operations online and/or through remote working capabilities.

Excusing or delaying performance. The law or the lease may include provisions that would exclude delayed or non-performance. Our colleague, Stephan Cutler, wrote previously about these issues. We note, however, that provisions excusing performance are strictly construed, require notice, and look at mitigation. Absent a landlord’s breach of the covenant of quiet enjoyment or an express term of the lease, it is unlikely that non-payment of rent will be excused.

Operations and management. Largely growing out of their duty of care to visitors and employees, landlords and tenants should consider what, if any, additional protocols are required.

Business interruption insurance. Nestled within your CGL policy is a potential recovery source for losses sustained by a landlord or tenant due to their inability to use the premises. Business interruption insurance usually requires physical damage. In some instances, however, coverage was purchased or extended to include closure due to actions of a civil authority, critical supply chain issues, or communicable or infectious disease. As with any insurance coverage analysis, a mastery of the policy and facts is necessary. To the extent the reader is unsure of what it purchased, COVID-19 is a potent reminder to evaluate insurance products.

COVID-19 is only beginning to alter the landscape of American life and business dealings. At Klehr Harrison, our counsel is guided by business considerations and working to assist clients through this time of tumult.

Please note, on April 5, 2020, the Pennsylvania Secretary of Health issued an Order mandating enhanced cleaning and disinfecting requirements for owners of large buildings. The Cleaning Order applies to owners of buildings of at least 50,000 square feet used for commercial, industrial or other enterprises, including but not limited to facilities for warehouses, manufacturing, commercial offices, airports, grocery stores, universities, colleges, government, hotels, and residential buildings with at least 50 units.

The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.

Co-author Gatetano P. Piccirilli is a partner in the Litigation Department at Klehr Harrison.