Navigating Leasing & Contracts Amidst a Pandemic
A version of this piece was also published by Graybill, Lansche, and Vinzani, LLC, and has been revised by the authors for SIOR Pulse.
Disclaimer from the Authors - A few important caveats. This is meant to provide general guidance only. It is not a legal opinion or intended to address any particular situation. Each circumstance and contract is different and must be analyzed independently. We only address possible commercial real estate impacts within the State of South Carolina. We encourage you to seek specific legal advice regarding the impact of COVID-19 on your business.
As the world continues to battle the ramifications of COVID-19, many of our CRE clients are asking for guidance and the impact on their business. Below is some insight we’ve shared with them.
Since this is an unprecedented event, we have little insight into how a court may rule on such a dispute relating to the current COVID-19 pandemic. Each state has varying case law, so please seek legal counsel in the state in which the property is located.
With respect to "force majeure," some states have generally defined it to mean “any act of God, governmental act, act of terrorism, war, fire, flood, earthquake, hurricane, or other natural disaster, explosion or civil commotion,” but a court will typically interpret the language as written in a contract (or lease in this context). It’s important that the definition in some states—while not specific to lease or contract disputes—includes non-natural type of events (i.e. terrorism, governmental act, civil commotion) which may further open the door for a court to hold that the pandemic is an applicable event, since it may not be readily identifiable as a “natural” disaster, and particularly if it leads to a tenant being forced to close by municipal order.
That said, a recent state’s contract dispute case has provided some insight into how a court would rule on a defense relating to force majeure, by noting that a “party to a contract must perform its obligations under the contract unless its performance is rendered impossible by an act of God, the law, or by a third party regardless of the probability or responsibility for such performance,” unless it "cannot by any means be accomplished, it is not considered impossible”(as opposed to commercial impracticability). The same case also considered the duty to mitigate as a factor in considering damages, providing that the injured party has a duty to make reasonable efforts to minimize the damages incurred (so that it can’t make a claim for damages that were avoidable by the use of “reasonable care and diligence” [but not “unreasonable exertion or substantial expense”]).
Based on the foregoing, it would seem that under the current circumstances, tenants seeking relief in some states would have a firm ground to stand on, and would make the individual language of the leases of the utmost importance, and further that landlords should take reasonable steps to mitigate as may be feasible. Also note that if there is an express list of circumstances in the document that would constitute a force majeure event, but that is not a complete list, a court will likely only apply the clause to events similar to those already listed under the legal principle of ejusdem generis, which states that when a limited list of specific things also includes a more general class, that the intent can be inferred that the scope of that more general class is to be limited to other items more like the specific items in the list. Some leases will have an express carve out that a force majeure event will not excuse any monetary obligation, and there is no express statute or case law in some states that would indicate such a clause as problematic.
We recommend all readers to consider including language related to “pandemics, epidemics, viral outbreaks” as part of their force majeure language in all future documents. You should discuss such language with your attorney.
As a general rule, we are finding that landlord “form” leases generally contain favorable force majeure language that applies as a blanket condition to all obligations set forth in the lease. That said, we have found several tenant form leases that limit events of force majeure to a set number of days for specific circumstances and a few that do not allow the application of force majeure to certain landlord construction obligations. Other tenant “forms” contain language requiring the landlord to provide written notice to the tenant of any matter of force majeure before the delay clock for force majeure will begin. We encourage you to review the force majeure language in all leases. Also, according to a recent article in the Wall Street Journal, “Even if a contract lacks a force-majeure clause, disputes can arise under common-law doctrine that allows for parties to be excused of obligations if a change in circumstances makes the contract impossible to carry out.”
CONDEMNATION, EMINENT DOMAIN OR INABILITY TO OPERATE:
Some tenants may also rely on the condemnation or eminent domain lease provisions, due to the fact that a governmental authority ordered closure may prohibit a tenant from operating. In some states there is no case law on whether a closure in this scenario could be classified as such. For example, in South Carolina the Eminent Domain Act (2006) prohibits some states or a local governments from "condemning, or taking, private property for any purpose except for a public use." This could lead to a rebuttal that any pandemic-related forced (or recommended) closure would be for the purpose of public safety or well-being, as opposed to public use. Another consideration is that most commercial leases require the tenant to operate in compliance with all applicable laws, ordinances, and governmental requirements, which, in the context of an ordered closure would require them to cease operations (or at least severely limit).
Landlords and tenants could also utilize this opportunity to use force majeure clauses proactively. For example, a landlord may claim force majeure clauses excuse co-tenancy requirements (opening, ongoing, or otherwise) and other obligations to its tenants and a tenant may claim force majeure clauses excuse continuous operations clauses to its landlord. Also, with respect to delivery dates and other critical lease dates, it is always a best practice (and even more important now), to communicate early and often with respect to construction or permitting delays.
Most loan documents do not contain force majeure provisions as lenders expect to get repaid on time no matter the delay. Often, loan documents prohibit landlords from granting rent concessions or modifying leases without lender consent. We encourage you to consider the impact of such concessions in the context of what is required by a loan covenant. Loan documents that contain “material adverse change” provisions may also give lenders the ability to place a borrower or guarantor in default as a result of closures due to COVID-19. Many loan documents also require borrowers to notify the lender of material adverse changes to avoid being in default.
When permitted by the applicable loan documents, we have seen some clients grant lease concessions. Landlords that are granting concessions are requiring tenants to repay the concession amounts beginning on a date certain and over a three-month period. We also encourage our landlord clients to consider including language stipulating the repayment of rent in case a tenant receives governmental assistance. We do not yet know the specifics of governmental intervention. That said, if the government provides a program to tenants for the payment of rent then the landlord should be the beneficiary of all or part of such concession. You may also want to consider including confidentiality provisions prohibiting either party from discussing the concession with third-parties.
Many clients are facing the impossibility of performance when it comes to closing. If you’re under contract with a pending closing date, you may not be able to close because title cannot be updated given that the applicable county Register of Deeds (“ROD”) office is closed. Fortunately, many ROD offices provide for electronic title updates and electronic recording. We note that most title insurance companies are also taking blanket title exceptions for matters resulting from the pandemic. That said, some title companies are providing insurance when recording cannot occur by using gap indemnities and affirmative coverage.
COVID-19 will change commercial real estate in so many ways. As the situation continues to evolve, we can provide more analysis for what the future holds. For now, we encourage you to communicate with your landlords, tenants and lenders in the context of your various contractual agreements.
About the Contributors
Wilson Kibler is a full-service commercial real estate company with offices in Columbia, Charleston, and Greenville. Wilson Kibler provides a broad range of commercial real estate services throughout the state, including tenant and buyer representation, leasing, acquisition and disposition, property management, development, and consultation. Each of these services is staffed by highly regarded professionals focused on providing value for clients throughout all phases of an assignment. Wilson Kibler is an Accredited Management Organization and its professionals hold prestigious designations including CCIM, CPM, LEED GA, and SIOR. For more information visit www.wilsonkibler.com.
Graybill, Lansche & Vinzani, LLC
Graybill, Lansche & Vinzani, LLC is a boutique commercial real estate and business transactional firm with offices in Charleston and Columbia, South Carolina. Our Firm has significant experience in commercial real estate, and we enjoy a reputation of providing high-quality legal services delivered practically and efficiently.
We focus our practice on the acquisition, construction, leasing, financing and sale of commercial property, and related business transactions. Our attorneys have a hands-on approach and become an invaluable resource to our clients both during and after the consummation of a transaction. Our goal is to become a valuable member of your corporate and development teams. In addition to providing quality legal advice, we bring a business perspective to each transaction. For more information visit www.glvlawfirm.com.