Summary of Tenant Approaches to Rent Abatement due to COVID-19
Tenant Tip Series *
Businesses large and small are being dramatically affected by the Shelter in Place orders of government due to the COVID-19 crisis. Rent is one of the most significant costs for most businesses. This is a Summary evaluating the potential bases for excusing (or at least delaying) the obligation of commercial tenants to pay rent during closures related to the COVID-19 pandemic.
Although the Summary provides analysis of applicable legal authorities in the context of terms commonly included in most commercial lease agreements, it is important to recognize that each particular lease will include unique terms and each particular jurisdiction will apply unique rules of law, and may or may not be subject to governmental moratoria. Therefore, the viability of relief under the various theories discussed in the Summary will ultimately require independent analysis of the terms of each specific lease as well as the laws and authorities applied in each governing jurisdiction.
With the foregoing in mind, please find a summary of the various approaches to negotiating abatement of rent during closures related to the COVID-19 pandemic below:
- Express Rent Abatement Provisions: Some leases might expressly provide tenants with the right to abate rent in the event that they are unable to use the Premises for reasons beyond tenant’s reasonable control. Each specific lease will need to be reviewed accordingly. Generally speaking, the abatement provisions in each lease will yield tenants’ strongest argument in negotiating abatement of rent.
All leases will address abatement resulting from casualty. In the event of a casualty, tenants may have the right to abate rent to the extent the premises is untenantable. “Casualty” is generally not defined in leases, although a common definition is “accident, mishap, or disaster”. Nonetheless, whether a casualty has occurred will likely be subject to legal argument and interpretation by courts. As such, the right to abate rent on the basis of a casualty provision will ultimately hinge on the language of the particular provision at issue, as well as the authorities applied in a particular jurisdiction. In any event, taking the position that COVID-19 is a casualty and rent should abate, should be an argument generally used in all cases.
- Force Majeure: Force majeure provisions typically delay or excuse performance when extraordinary events occur that are unforeseeable and beyond the control of the parties. Force majeure may excuse tenants’ obligation to remain open during the COVID-19 pandemic. However, a force majeure provision, on its own, likely does not excuse tenants’ refusal to pay rent. Of note, leases frequently state that tenants’ obligation to pay rent cannot be excused by force majeure.
- Compliance with Law: Most leases provide that tenants must operate from their leased premises in compliance with all applicable laws. In jurisdictions where all non-essential businesses have been ordered closed during the COVID-19 pandemic, operating from the premises would be illegal. This may create a frustration of purpose argument.
- Common Law Principle of Frustration of Purpose: This principle provides that a party may be excused from performing its contractual obligations if a change in circumstances makes it physically or commercially impossible to perform the contract, or would render performance radically different. This principle may provide tenants with a reasonable basis to abate rent during business closures related to the COVID-19 pandemic. Unlike the doctrine of impossibility of performance, frustration of purpose applies where performance remains possible, but the reason the parties entered the agreement has been frustrated by an overriding circumstance that was not anticipated, such that the value of performance by the party standing on the contract (likely, the value of operating a business from a leased premises) is substantially destroyed. Tenants may have a strong argument that frustration of purpose excuses the obligation to pay rent during the COVID-19 pandemic. It is worth noting that some leases will attempt to have tenants waive all equitable defenses.
- Common Law Principle of Impossibility of Performance: Impossibility of performance is a defense to a breach of contract action and the burden of proof in establishing it rests on a defendant. “Impossibility” is defined in section 454 of the Restatement of Contracts, as not only strict impossibility but as impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved. This principle does not provide tenants with a strong argument to abate rent, as landlords will contend that payment of rent has not been rendered “impossible” by COVID-19, regardless of whether tenants can operate their businesses during the pandemic.
- Moratoria on Commercial Evictions: A number of jurisdictions, including the County of Los Angeles, have now issued temporary prohibitions on evicting commercial tenants during the COVID-19 pandemic. However, the Los Angeles moratorium and similar prohibitions generally do not excuse the obligation to pay rent and often postpone payment to a later date. Rather, they provide that tenants may not be evicted as a result of inability to perform under a lease as a result of the pandemic. Again, the applicability of these prohibitions will depend entirely upon the language of each specific moratorium.
- Business Interruption and Business Income/Rent Loss Insurance: The tenants to commercial leases may look to business interruption insurance as a source of relief during the COVID-19 pandemic and landlords may look to business income/rent loss insurance. Business interruption insurance typically provides coverage in the event of losses sustained as a result of direct interruptions to business operations. We anticipate that insurance carrier(s) will vigorously contest these claims both on the basis of lack of physical damage and specific policy exclusions.
Commercial landlords may seek reimbursement under business income/rent loss insurance for income lost while a tenant ceases operations or the leased premises is repaired or rebuilt as the result of a covered loss. Whether such coverage will be effective during the pandemic will depend on the language of each policy and specific exclusions thereto.
- Cautionary Note: On a cautionary note, commercial tenants should be aware that California Civil Code section 1951.4 provides landlords with a draconian remedy in the event that tenants vacates the premises prior to receiving notice to vacate. Under section 1951.4, a landlord faced with a tenant who has prematurely vacated the premises, can continue the lease for the unexpired lease term and continue to collect rent with no duty to mitigate damages. This landlord remedy only applies in situations where: it is specifically provided in the lease; and tenants have the right to assign or sublet the premises.
Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.