Tenant and Landlord Struggles During the COVID-19 Pandemic

March 31, 2020

Given the spate of government-imposed business shutdowns designed to slow the spread of COVID-19, many retailers, restaurants, dental practices and other service providers deemed “non-essential” have experienced forced closures of their business. The consequent steep decline in revenue has tenants searching for ways to conserve cash, and many are turning to their landlords to request rent relief.

Last week, national restaurant chain The Cheesecake Factory informed its landlords that the company would not make its April 1, 2020, lease payments due to the closure of its restaurants. In contrast, some  mall owners have informed their tenants that they fully expect their tenants to meet their lease obligations during the COVID-19 crisis, typically citing ongoing mortgage, utilities and other payment obligations. Both sides have valid points. Tenants are struggling to conserve sufficient funds to weather the pandemic and remain an ongoing business enterprise. Landlords, in turn, are trying to balance the competing demands of their lenders, governmental directives and their own cash-flow concerns when considering tenant requests for relief.

Key issues facing landlords and tenants during the pandemic are discussed in more detail below.

Look at Leases

When considering what stance to take during rent relief discussions, both parties need to fully understand their lease obligations and available remedies. Many leases contain a force majeure clause excusing the parties’ performance due to events such as strikes, government directives and, occasionally, pandemics. Frequently, these clauses include catchall language for unnamed events beyond the parties’ reasonable control. These clauses can be interpreted to include the current COVID-19 pandemic, even if the term “pandemic” is not expressly listed as a force majeure event. Note though that a frequent carve-out from the operation of the force majeure clause is the prompt payment of rent and other sums due under the lease. Each party will need to examine the lease’s force majeure provision in detail to determine what, if any, leverage they may have in rent deferral discussions. For an in-depth discussion of force majeure and other legal doctrines that may apply in the absence of an express force majeure provision, see McGuireWoods’ March 18 alert.

The force majeure clause is not the only potentially relevant lease provision. Some leases may contain co-tenancy clauses that predicate the tenant’s performance of its lease obligations on the continued operation of a separate tenant in a shopping center or mall. Leases can also impose obligations upon the property owner regarding the continued operation of the shopping center that may come into play if the center is shuttered. The potential presence of these clauses highlights the need to fully understand the parties’ respective lease obligations before entering into rent relief discussions.

The Landlord’s Perspective

As noted above, when considering a tenant’s request for rent relief, a landlord also needs to assess its financial obligations and cash reserves. Some landlords may be able to grant temporary concessions without suffering material harm, while others may struggle to meet their mortgage and other obligations as a result of a substantial reduction in rent payments. Landlords in the latter position will need to have frank and open discussions with their lenders regarding the potential for forbearance. The responses to these requests will vary by lender, but at a minimum, each landlord should approach forbearance discussions with transparency and a plan for resuming payments. Anecdotally, it appears that some lenders are expressing a willingness to consider temporary relief in light of the COVID-19 pandemic. In the multifamily context, the Federal Housing Finance Agency announced on March 23, 2020, that multifamily property owners would be eligible for mortgage forbearance on the condition that they suspend evictions for renters unable to pay rent due to the impact of COVID-19. For further details regarding this announcement, see McGuireWoods’ March 26 alert.

Landlords who take a stronger tack and demand strict compliance with a tenant’s lease obligations need to fully consider the practical issues associated with enforcing the lease. The pandemic has shut down many courts, limiting them to emergency matters only. Some judges may take the view that an eviction action is not an emergency worthy of the court’s limited resources. If an eviction lawsuit is successful, the landlord should think carefully about the practical ramifications of evicting the tenant during the pandemic. For example, what is the likelihood of finding a replacement tenant in the current environment? Given repair and buildout costs associated with a new tenancy, does it make sense for the landlord to flex with the tenant and negotiate a plan for the resumption of payments when business resumes or go ahead and evict now? If the landlord and tenant ultimately agree to work together, they need to devise a plan for deferral of rent, payment of utilities, insurance and taxes, and to negotiate a trigger and timing for resumption of rent payments and payment of deferred rent.

Some landlords have told tenants to look to their business interruption insurance for income replacement. However, making a claim under a business interruption policy is not as straightforward as it may seem. Most business interruption insurance policies cover loss of business income due to a casualty or other physical damage. Whether the COVID-19 pandemic fits neatly within the scope of typical business interruption coverage is currently an open question. For a more detailed discussion of business interruption insurance coverage, see McGuireWoods’ March 24 alert.

A Negotiated Solution May Be the Best Alternative

Ultimately, both landlords and tenants need to approach negotiations with a different mindset than “business as usual.” The COVID-19 pandemic has forced tenants and landlords to reckon with an almost unprecedented set of circumstances. To procure the best possible outcome, both parties may find it in their best interests to work in tandem until normal business functions resume. Federal and state relief may also be of help. At the state level, low-interest loan programs designed to serve as bridge loans during the pandemic may be available. At the federal level, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has allocated substantial funds for low-interest loans to small and large businesses. These loans cover costs during the mandatory shutdown and encourage businesses to retain their employees. For more details on the sources of funding available under the CARES Act, see McGuireWoods Consulting’s March 26 alert. By working together on rent relief and seeking potential alternate sources of funding, landlords and tenants may find an acceptable compromise that allows each party to survive and thrive.

McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial coronavirus-related business and legal issues, and the firm’s COVID-19 response team stands ready to help clients navigate urgent and evolving legal and business issues arising from the COVID-19 pandemic.