Impacts of COVID-19 on Landlord and Tenant Obligations in Commercial LeasesTuesday, March 31, 2020
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Commercial leases typically contain provisions that apply in times of crisis or unexpected closure of businesses. As a result of complications presented by the COVID-19 pandemic, landlords and tenants are looking to the wording of their leases to determine how to address these complications. While landlords and tenants are encouraged to seek formal legal advice from their legal counsel regarding the interpretation of and actions taken in accordance with their lease agreements, below is an overview of common lease provisions that may come into consideration when addressing COVID-19 related closure issues.
Continuous Operating Covenants
Many commercial leases, especially in the retail and hospitality sector, require the tenant to operate during certain hours of business throughout the term of the lease while being fully stocked with merchandise and adequately staffed. The breach of this obligation, as well as any “abandonment” or vacating of the premises for more than a prescribed period of time, will often result in a default under the lease. Since mid-March, the recommended or mandated closures of “non-essential” businesses by governmental authorities (including the Ontario Government) have imposed significant limitations on the ability of tenants to operate at their premises. During this time, it is important for parties to remain open to creative solutions, as we are seeing with restaurants remaining open for take-out or delivery only, and landlords should act reasonably when confronting mandated business closures. Nevertheless, all parties should acknowledge the context of the situation when considering default measures and recognize that the requirement to remain open for business may also be curtailed by force majeure, unavoidable delay or other similar clauses described below.
It is common for commercial leases to include clauses that address the failure of a landlord or tenant to perform its obligations due to circumstances that result in “unavoidable delay.” In such instances, these provisions operate to excuse a party that has been delayed or prevented from performing a term, covenant or obligation under the lease as a result of circumstances beyond the control of the delayed party. Similar to a force majeure clause, unavoidable delay clauses often include examples of what might be considered to be “beyond the control” of a party such as riots, rebellion, war, acts of terrorism, “acts of God”, government or municipal closures, etc. Delays resulting from these types of events are often permitted until the unavoidable event has ceased. The important caveat to many of these clauses is that they often do not excuse the tenant from the prompt payment of rent. Landlords and tenants should review their leases carefully, as “unavoidable delay” clauses are sometimes included under the titles of “Inability to Perform Covenants” or “Force Majeure” and may be located in the often overlooked “General” or “Miscellaneous” sections of the lease.
The obligation for a tenant to pay rent is unlikely to be excused or suspended in any circumstance. As a cautionary note, a tenant should never refuse or withhold the payment of rent (even in cases where a dispute has arisen). The refusal to pay rent may permit a landlord to enforce its rights and remedies under the lease, which can include changing the locks and re-entering the premises, seizing the tenant’s goods and terminating the lease and commencing an action against the tenant for all rent payments owing under the lease for the remaining term. Landlords should be aware that such actions come with a general duty to mitigate any losses arising out of any such termination.
Notwithstanding the strict obligation to pay rent, it is advantageous for landlords and tenants to have a constructive dialogue on what can be done to ensure that the payment of rent is viable for both parties during this difficult time. An open dialogue may also save considerable time, money and resources that can be quickly consumed by protracted disagreements or court proceedings. Depending on the situation, landlords may be willing to explore creative rent solutions during unanticipated business closures including, but not limited to: (i) deferring rent payments to later months; (ii) freezing basic or minimum rent payments for a period to be agreed upon between the tenant and the landlord, while still requiring the tenant to pay the additional rent required to manage the property; and (iii) applying the rent or security deposit to missed rental payments without requiring the tenant to top-up such deposit until the tenant has re-opened for business.
Landlords and tenants should be reviewing their insurance policies with their advisors and insurance providers to determine what insurance coverage may be available to them for COVID-19 related losses. Most commercial leases require both the tenant and the landlord to maintain property, business interruption and general liability insurance. It is likely that business interruption insurance (for the tenant) and rental loss insurance (for the landlord) will be the areas where tenants and landlords seek to obtain relief. However, as business interruption insurance is typically linked to property insurance policies, relief for business interruption commonly only extends to losses arising out of damage to the Tenant’s property or the place where the tenant carries on its business. Whether these types of insurance will cover losses arising out of a pandemic that was not explicitly included in the policy will be unique to each insurer and depend on whether the presence of the virus can be characterized as “damage” to the property. The type of relief available will become clearer as landlords and tenants begin to file insurance claims.
While the above summary may provide a useful guide on how common lease provisions may be interpreted and applied to the unforeseen effects of the COVID-19 pandemic, landlords and tenants are encouraged to pay attention to the specific details of their commercial leases and consult with their legal counsel before taking action.
If you have any questions with respect to this legal update, please contact Dan Shapira (firstname.lastname@example.org), Tommy Sorbara (email@example.com), Jessica Sorbara (firstname.lastname@example.org), or any other member of Wildeboer Dellelce LLP.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.