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As the world continues to contend with the Corona Virus outbreak, our inquiries (particularly from the United States, Canada and Australia) about commercial leases has skyrocketed.
Here is what you will learn more about in this post:
Not much for reading? Here is a message from our CEO on the Corona Virus with some actionable advice:
First, let’s talk about what clauses in a commercial lease would address this pandemic.
Basically force majeure is an act that neither the landlord or tenant saw coming, and is out of their control.
Mostly it is designed for natural disasters – hurricanes, typhoons, earthquakes, forest fires, floods, etc. It would also cover strikes (example – a construction strike would lead to you or the landlord not finishing the build out on time; a labor strike could lead to you not being open for business).
Here’s the thing.
I have reviewed over 2,000 commercial, retail and industrial leases.
None of them had any of the following terms: pandemic, epidemic, outbreak, infectious disease, public health emergency.
So I will go on the assumption that your lease is the same. In fact, only 56% of the leases that we have reviewed even have a force majeure clause.
What’s more, is that the force majeure clauses are also vague. Here is an example:
Means any period of delay which arises from or through Acts of God, strikes, lockouts, or labor difficulty, explosion, sabotage, accident, riot, or civil commotion; act of war; fire or other casualty; legal requirements; delays caused by the other party; and causes beyond the reasonable control of Landlord Tenant, their agents, contractors and representatives.
So where doe it say that the tenant will have a rent abatement in the event that there is a force majeure event?
First of all, it is open to interpretation – a “lockout” is not a government “lockdown”.
I would argue that this either a civil commotion or a cause beyond the reasonable control of the landlord and tenant.
It would be preferable if outbreak, and public health emergency were specifically mentioned and I suspect millions of commercial leases are in the process of being updated right now.
So here is where we are at. Half of commercial leases do not even address force majeure, and the majority of ones that do, do not go into detail on what happens if there is an unforeseen event.
So to answer the question: no, you most likely do not have an explicit right within your lease to cancel, based on COVID-19.
In 100% of the commercial leases we have reviewed, there is a tenant default section.
Basically it lists the different ways you are in breach of the lease (spoiler alert: it’s usually just about paying the rent).
There is generally a cure period and a penalty.
Some default clauses have an accelerator – meaning you owe the next 3 months of rent if you are late on your payment, or you could owe the remaining balance due.
So your risk on not paying the rent is that the landlord could take the position that you are in default, and they can take the space back, and you will still owe the rent that is due.
What’s worse is that 64% of the leases that we have reviewed have a tenant personal guarantee. This is a business owner being personally responsible payment of rent (not just the corporation on the lease). *side note – some of them had enough leverage to get rid of them; others were able to reduce the liability on them*
If you stop paying rent because of the Corona Virus the landlord could put you in default of the lease, could lock you out, and you could owe the balance of the rent due (both from your corporation, and you may have to back that up personally).
On top of this is the go dark clause.
Even if you are still paying rent, you likely have the inability to “go dark” (it is more common in retail than office leasing).
A landlord typically will have the right to put you into default of the lease if you do not operate in the premises.
It’s all about appearances and a retail landlord wants to show a vibrant, healthy shopping mall, retail outlet, or shopping plaza.
Will this happen? Keep reading.
Business interruption insurance was invented to help companies pay their bills when events like this happen.
We do not get involved in such policies. Your lease will cover the insurance you are required for liability associated with your premises, but business interruption insurance is a personal matter to you.
I would suggest you contact your insurance provider, review your policy and see what it says.
Here are some questions I would ask (feel free to copy and paste into an email to your insurance provider):
Does my policy include business interruption insurance?
What are the covered perils under the policy?
Does it contain a requirement for physical damage?
Would a public health emergency qualify?
Does it include civil authority coverage?
Does the policy cover supply chain interruption?
What are the timelines and waiting periods?
(by the way, I expect infectious diseases to be something that will be specifically excluded from policies moving forward in the wake of this outbreak)
I would also recommend that you document steps you have taken as a business owner. Insurance companies will attempt to protect their losses by proving any negligence, wrongful acts, or failing to act to mitigate your business losses.
We do not know how many small business owners have business interruption insurance as it is not part of the lease negotiation (I suspect it’s not that many).
Frankly, in a time in which systems are overloaded, even if you have it – who knows how long insurance companies will take to make their payments (and will they have the money?) – their claims are at an all time high.
Imagine if you got into a car accident but everyone else in the world got into a car accident at the exact same time.
I try to make this blog informative and bit fun.
Obviously these are not fun times. This is serious stuff – we have never seen such a health OR an economic crisis and they are happening at the same time.
Life will go back to normal. Whatever the new normal will look like.
Businesses will operate again. We will all have to figure out this mess together.
In the meantime, I would advise you to contact your landlord. The first thing you can offer is your security deposit.
Have your landlord apply your security deposit to the next month of rent due.
Secondly, let the landlord know you cannot afford the rent, and open up the negotiation on getting some free rent now, in exchange for an extension of the lease term (example: you get 3 months of free rent in exchange for extending the lease by another year).
Remember – negotiations are about leverage. If the landlord thinks you are going to default, it normally takes months before a replacement tenant is found and is paying rent in a normal market – right now there are no replacement tenants.
On March 11, the World Health Organization (WHO) proclaimed this to be global pandemic. You have leverage here – go and speak with your landlord today.
Jeff Howell is the Founder of Lease Ref, an online commercial lease review company that specializes in assisting retail tenants with their commercial lease matters. Jeff has been working with retail tenants for twenty years. For further information please contact Jeff at jeff (at) Leaseref (dot) com.