New York courts are resuming some operations, but eviction proceedings, including for violations of commercial leases, are still suspended. However, those contracts — and the obligations they created — still exist. Landlords, tenants and any fund with an interest in the contract should enter into dialogue and negotiations with the understanding that even force majeure clauses often do not excuse tenants’ obligations to pay.
The economic fallout from the COVID-19 pandemic is forcing commercial landlords and tenants to confront a host of difficult business decisions and legal questions concerning their relationship. Now is the time for these parties to scrutinize their leases to determine how best to protect their respective interests. This alert addresses some of the key contractual provisions and legal doctrines that landlords and tenants should consider as they assess their options. It concludes by encouraging the parties to engage in dialogue and negotiation, either directly or, when appropriate, through counsel.
New York landlords currently have little ability to pursue legal claims against defaulting tenants. New York State has halted all residential and commercial evictions until August 20.[1] Landlords may serve rent demands, but they cannot commence litigation against tenants, such as eviction proceedings.[2] New York City has expressly warned that tenants are not excused from paying rent during the COVID-19 crisis, even if their revenues have declined precipitously. However, a bill that has been introduced in the New York State Senate — but has not yet been enacted — would “suspend rent payments and certain mortgage payments for certain residential tenants and small business commercial tenants for ninety days.”[3] Other states, such as New Jersey, have put certain other moratorium relief in place.[4]
Given these restrictions and the current economic challenges, commercial landlords and tenants should consider how their respective leases allocate the risks stemming from business interruptions, such as those caused by COVID-19, as well as their own business goals. Because landlords cannot commence eviction proceedings for the immediate future, they may wish to consider what other legal remedies are still available to them. Even though a tenant may benefit from a moratorium on certain enforcement actions, the lease may still be in default (subject to the application of certain legal arguments discussed below) and potentially lost as an asset once the COVID-19 crisis subsides. As such, tenants should evaluate the consequences they might face if they default on their leases and engage in discussions to seek rent reductions or even lease terminations. When making these assessments, the specific terms of the lease agreement are paramount.
Additional Security Commonly Available in Leasing Arrangements
In many commercial leasing arrangements, tenants (or their principals or affiliates) provide one or more forms of security to their landlords. These provisions generally reflect the parties’ pre-negotiated allocation of risk for business interruptions. For example, many leases (or the economic obligations thereunder) are guaranteed by tenants’ principals or affiliates. Similarly, tenants often provide standby letters of credit or cash security deposits to their landlords. Depending on the terms of these specific documents, the liability of parties affiliated with the tenants may be triggered, and landlords may be able to collect money on account of rent, notwithstanding the moratorium on evictions. Before defaulting on the payment of rent, tenants may want to consider whether they, their principals or their affiliates are financially exposed.
In the case of guaranties, it is quite common for the guarantors to agree to a broad waiver of defenses that might otherwise have been available to the tenants. Thus, even if tenants have arguments concerning force majeure, constructive eviction, impracticability or frustration of purpose (which doctrines are discussed below), it is quite possible that their guarantors cannot invoke these doctrines as defenses to payment and would be liable under the guaranties.
In addition, it is generally not necessary for a landlord to commence legal proceedings against the tenant for liability on a guaranty to be triggered. The words of the guaranty itself will govern what is required and must be reviewed. Moreover, it is not necessary to commence legal proceedings to make the demand for payment on guaranties, and the mere demand (or ability to make such a demand) may alter the leverage and dynamic among the parties in negotiating rent reductions or forbearances.
Relatedly, depending on the language of the parties’ agreements, it is likely not necessary for landlords to commence legal proceedings before drawing down on letters of credit or offsetting against security deposits.[5] In both instances, however, it is important to adhere precisely to the agreed-upon requirements of the applicable documents to avoid a potentially costly and successful challenge to these self-help remedies. Both landlords and tenants should consult with legal counsel as they navigate these complex issues.
Other Relevant Lease Provisions and Legal Doctrines Affecting Payment of Lease Obligations
Tenants seeking to permanently or temporarily excuse their performance may wish to consider one or more of the following approaches (which landlords should also anticipate and assess).
Many leases include force majeure clauses, which excuse a party’s performance if an unforeseen external event beyond the party’s control has prevented it from being able to perform its contractual duties. A typical force majeure clause might read:
The occurrence of any of the following events shall be referred to herein as “Force Majeure” and shall excuse the obligations of Landlord or Tenant as are rendered impossible or reasonably impracticable as a result of the...
