March 26, 2020
This article has been reposted with permission from the authors. The original article can be found HERE. Please see original article for citations.
The current COVID-19 pandemic has created myriad lease issues for retail tenants who have either closed stores or are contemplating doing so imminently, and are analyzing their ability to abate rent during the closure. We wanted to share initial thoughts.
Top level conclusions:
- Potential arguments depend on lease language, the law of the applicable jurisdiction, facts relevant to the specific location and will need to be considered on a case-by-case basis.
- Retail tenants have strong intuitive arguments regarding rent abatement in the event that a shopping center is closed and/or the tenant space cannot be used by a tenant to operate its business. The argument is basic—the tenant is not getting what it bargained for, which is a shopping center and tenant space where it can operate its business. A straightforward analogy provides insight: where a supplier contracts to provide ten widgets a month, and can’t provide the widgets for one month, even if it is not the supplier’s fault, the purchaser does not pay for the ten widgets that were not supplied. Here, there is no real “shopping center” provided, because there are no customers or operations to support a shopping center as an ongoing concern.
- This intuitive argument is consistent with the language of many leases through language that explicitly or implicitly places an obligation on landlord to provide a “shopping center,” and to provide a space in which the tenant can “operate” its business. If a landlord fails to provide either, then there is a breach and the tenant is entitled to a variety of remedies. Provisions to consider are provisions requiring landlord to operate a “first class shopping center,” provisions entitling tenants to “quiet enjoyment,” and certain warranty language.
- Co-tenancy provisions may also provide a basis for at least partial abatement of rent. Some leases provide for an immediate right to pay substitute/co-tenancy rent in the event that co-tenancy occupancy thresholds are not satisfied.
- Many leases have force majeure provisions that need to be examined. Questions to consider are whether the current COVID-19 crisis is within the definition of a force majeure event, and how the force majeure language might impact payment obligations. If there is language limiting the impact of force majeure on the ability to pay, tenants will need to be clear that the impact of the force majeure event is on the failure to operate a shopping center and provide a space in which tenants can operate their business.
- Many leases also have landlord default provisions which vary and should be considered.
- Retail tenants may also have arguments regarding impossibility/frustration of purpose. These arguments rely on the intuitive framework discussed in point 2, above.
We have identified four general issues, which will be discussed below:
- Are landlords in breach of leases?
- Do co-tenancy provisions permit the abatement of rent?
- Do force majeure provisions excuse payment (or, in the alternative, do not prohibit tenants from abating rent)?
- Is performance excused under the doctrines of impossibility/frustration of purpose?
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I. Breach of Contract
Overview: Depending on lease language, landlords may have obligations to operate their shopping centers in a certain manner or, more likely, to operate the common areas in a particular manner. If breached, lease language will inform whether immediate abatement of rent is available as a remedy.
A. What rights are created under the leases:
- Tenants will want to argue there is an obligation on landlords to make space available for tenant to operate its business as described in the leases. The leases should be reviewed for specific language and for an implied obligation.
- If the tenant can no longer operate its store consistent with the purpose set out in the lease, tenant can claim that is a material breach of the contract.
- Some leases have requirements regarding a landlord’s obligation to operate the shopping center more generally (and may require that the shopping center be operated consistent with a first-class shopping center).
- Many leases require landlords to operate shopping center common areas (sometimes consistent with a first-class shopping center).
- If a shopping center or common area closes, there is a strong argument these duties are breached.
- If a shopping center does not close, the tenant might nevertheless argue that the shopping center is not truly “retail in character” if customers are not there and other businesses are not operating. The tenant could also argue that it does not have access to common areas under these conditions.
- Governmental orders prohibiting nonessential activities may strengthen this argument.
- Leases may also contain quiet enjoyment provisions that grant tenants the right to the store without any hindrance or interference to the tenant’s possession and use.
- Tenants may also argue that landlords have violated warranty provisions regarding the continuing operation and conditions in the shopping centers.
B. Remedies for breach:
- Remedies for breach will in many cases include those provided by common law, and will be lease-specific.
- Regarding any lease-specific remedies, the leases will in some cases give landlords the opportunity to cure, and the right and time period allowed to cure should be considered in evaluating any lease-specific remedies.
- Common law remedies are not subject to a cure period and, if allowable under a lease, provide a potential basis to abate rent for the period landlord fails to provide either a shopping center or a space for tenant to operate its business.
C. Effect of force majeure:
If there is a breach, landlords will likely argue force majeure excuses the failure to perform, as discussed below.
D. Equitable considerations:
- The benefit that retail tenants expect to receive under a lease is a shopping center with a space for a retail tenant to operate a store.
- Under the current circumstances, there is effectively no “shopping center,” because there are no customers or operations to support a shopping center as a going concern.
- Tenants are therefore currently not receiving the benefit of that bargain, and it would be inequitable for landlords to receive full payment under these circumstances.
- The strength of this argument may depend on whether leases include provisions including: (1) whether the tenant’s premises are part of the shopping center; (2) whether the landlord must provide and maintain a first-class shopping center; and (3) whether the landlord has an obligation to operate common areas in a condition suitable for their intended purpose.
E. Further lease-by-lease analysis of breach should include the following questions:
- What are landlord’s specific operating obligations?
- Are they breached? (Easier if shopping center or common areas have closed.)
- Does force majeure excuse these obligations? (See below.)
- Are there lease provisions that support equitable arguments?
Overview: Given the increasing number of store closures, it is very likely that co-tenancy thresholds will not be met. This could be an effective argument for rent abatement. However, some co-tenancy provisions may contain language attempting to exclude closures for force majeure events, or may not provide relief until a certain length of time (90 days or more) passes.
A. Co-tenancy rights:
1. Types of Provisions
a. No lag time: remedies ripen as soon as the co-tenancy thresholds are not met.
- These may provide timely rent relief.
- Retail tenants will need to consider whether an alternative rent measure is in lieu of all payments owed, including minimum rent, CAM and the like, or only minimum/percentage rent.
- Retail tenants may have an argument that rent is abated because sales are 0.
b. Lag time: Other leases may have a longer lead time before the right to abate rent ripens.
- In this scenario, co-tenancy requirements may not provide relief unless closures exceed the lag time.
- Certain leases may attempt to exclude force majeure closures from being considered closures for co-tenancy purposes.
B. Further lease-by-lease analysis of co-tenancy should include the following questions:
- Is the co-tenancy threshold met?
- Is there a delay before the rent abatement remedy ripens?
- What charges are abated?
- Is there a force majeure exclusion in the rent abatement remedy?
III. Force Majeure
Overview: There are two primary arguments related to force majeure provisions in leases. First is the issue of whether retail tenants can use force majeure provisions to their benefit. Second is landlords’ ability to use force majeure as a defense to performing their own obligations. The answers will need to consider the specific lease language.
A. Preliminary consideration – whether the epidemic qualifies as a force majeure event:
- Force majeure events are typically construed narrowly.
- Some authorities have concluded that if public health events are not included in the force majeure language, they were not intended to be covered.
- However, landlords may argue this is an unprecedented event in commercial leasing, and therefore that it is similar to other “acts of God.”
- If governmental orders require cessation of operations, there may be a stronger case for force majeure if government orders are specifically included as a force majeure event.
B. Depending on lease language, force majeure provisions may be asserted as a tenant’s basis to abate rent, or as a basis for landlord’s defense:
- If the current situation falls within the definition of a force majeure event, tenants can use the force majeure clause to argue that tenant obligations are stayed while the force majeure event continues.
- An issue that will likely be disputed is the impact of any language that provides something like “payment obligations are not to be impacted by force majeure event.” Landlords will argue that such language means that tenant cannot use the current situation as a basis not to pay rent. Tenants will argue that such language was intended to deal with force majeure events that impact the ability to pay, not situations impacting the specific location and the provision of a shopping center and space for tenant to operate its business. Tenants’ argument is supported by the breach argument discussed above and frequent language in force majeure provisions that provide that the impact of a force majeure clause is to extend the lease for the period of the force majeure event. The tenant argument will be that the impact of a force majeure event is that tenant still gets to operate for the period of time in the lease and pay rent for that same period of time. The parties did not intend for tenant to pay rent for a longer time than it is able to operate.
- Further, where landlords close shopping centers or cease operations of the shopping centers or common areas, retail tenants may argue that landlords have failed to provide a space for tenants to use and operate, thus providing an equitable argument for rent abatement.
C. Further lease-by-lease analysis of force majeure should include the following questions:
- How is a force majeure event defined?
- Does the force majeure language reference payment obligations?
- Does the force majeure language extend the lease by the period of the force majeure event?
IV. Impossibility/Frustration of Purpose
Overview: Retail tenants could also assert arguments regarding temporary frustration of purpose/impossibility. Considerations include that the law is not as developed with respect to “temporary” circumstances, and these doctrines may be construed narrowly.
- Leases typically identify the use intended for the premises (e., retail store).
- Tenants might argue that:
- With regard to operating the store, performance is impossible (especially in light of government restrictions).
- With regard to frustration of purpose, the purpose of the lease – to operate a retail store – has been wholly frustrated on a
- Tenants could argue that these facts excuse full performance under the leases – e., operating continuously and paying rent.
- There is at least some legal authority that suggests these doctrines may be invoked on a temporary basis – e., temporary frustration of purpose. However, this area of the law is not well-developed. The majority of cases involve situations where the impossibility or
frustration is permanent, and termination is the remedy.
These doctrines may be applied very narrowly by the courts.