Reed Smith Client Alerts

As the United States proceeds from what might be termed “the end of the beginning” of the COVID-19 pandemic to the next stage of responses by governments and private actors, landlords and tenants face vexing questions raised by business closures, missed rent payments, requests for rent abatements, and potential defaults in loan and lease documents. Unfortunately, data and statements from public officials indicate that the crisis may not end any time soon. This client alert addresses some common questions that landlords and tenants continue to have as the situation evolves, and some steps that parties have taken to respond in a constructive and sustainable fashion.

Authors: William A. Organek

New York City skyline

Defaults: How should missed payments be addressed? Are there defenses to missed payments?

Early data indicates that as many as half of all small U.S. businesses did not make their full rent or mortgage payments in April, with tenants in the retail, restaurant, and consumer service industries among the first to seek rent relief from landlords.1 Even nationally listed tenants have stated publicly that they do not intend to make April rent payments.2 Some tenants are seeking longer forbearances, with some requesting rent abatements into July or later. While both landlords and tenants have arguments to support payment or nonpayment of rent, ultimately parties will need to find a negotiated solution that works for both (and any lender that may be involved).

Tenants may seek to rely on any force majeure language included in their leases to delay or avoid rent payments. These provisions vary from lease to lease, but generally can excuse delayed performance or nonperformance of a lease covenant by a tenant or landlord due to an “act of God.” Although such provisions must be closely examined in each lease, in general these provisions almost always contain carveouts requiring the payment of rent regardless of any force majeure claim, so force majeure alone may not be helpful for tenants.

Nevertheless, tenants are not without possible arguments to excuse their defaults. Tenants can suggest that other provisions of their leases, such as abatements in the event of a casualty or condemnation, might act to permit a rent abatement. Closure of a retail store by government action, the argument goes, effectively constitutes a (possibly temporary) condemnation, and therefore entitles the tenant to any remedies under such a provision. Tenants may also argue that their inability to use their leased space because of a closure by the landlord (whether or not mandated by the government) is a landlord default under the “quiet enjoyment” provision of their lease. Landlords may also be unable to deliver services mandated by the lease or by law, triggering another possible default. Frustration of purpose, impossibility, constructive eviction, and other common-law doctrines are other avenues tenants can explore to excuse their missed payments.