Some Judges Side With Landlords, Refuse To Excuse Tenants From Paying Rent
Attorney Zach Allen had never in his 20 years of practicing real estate law seen the possibility of a pandemic or epidemic included in a standard real estate lease as an “act of God” similar to a war, hurricane or earthquake. Until the past year.
The pandemic has fundamentally transformed how most attorneys and their clients consider force majeure, a lease clause that limits the liability or obligations of tenants and landlords in the event of such catastrophes, Allen said. Those clauses had formerly been “one of those often-overlooked boilerplate provisions,” he added.
“Most landlords and tenants had little cause to invoke it except for maybe the occasional weather-related delay,” Allen, a member of the real estate practice group at the Oklahoma-based Crowe & Dunlevy law firm, told CoStar News. “I’ve looked at a lot of lease agreements for national retail tenants,” he said, and “I don’t think I’ve seen one that actually anticipated a pandemic. We’ve never encountered a situation like this.”
A year after the pandemic wreaked havoc on businesses ranging from stores, restaurants and movie theaters, force majuere clauses have become the most discussed portions of any new commercial real estate lease. They’re also being modified or added to existing leases in anticipation of the next crisis or unexpected event. And major changes are underway to other general lease language on issues such as rent abatement and lease termination rights, according to real estate attorneys and brokers representing both sides of negotiations.
The change comes after the pandemic and government emergency orders forced businesses in shopping malls, restaurants and office buildings as well as other commercial properties to close or sharply limit occupancy. Many struggling tenants stopped paying rent or abandoned their space, causing high-profile fights between landlords and tenants. Some conflicts have escalated to lawsuits over who should bear financial responsibility for the disruption that has caused billions in lost sales and income and contributed to millions of lost jobs and a rising tide of business bankruptcies.
“We’re seeing language involving government-mandated shutdowns in virtually every new lease,” said Scott Burns, retail brokerage lead in Los Angeles and managing director for JLL.
Almost one-third of leases signed between April 1 and Dec. 31, 2020, in the United States specifically listed a pandemic as a force majeure event, compared with just 4% of leases signed prior to the crisis in 2018 and 2019, according to a survey of more than 300 recently signed leases conducted by business and legal research firm LexisNexis.
In total, more than 60% of leases signed from April through December mentioned the pandemic, other public health crises, coronavirus-driven emergency shutdowns or laws that could effectively make it illegal to fulfill the lease terms, the survey found.
“Force majeure clauses went from being somewhat boilerplate prior to the pandemic to being one of the more negotiated provisions in a lease negotiation,” Michelle McAteer, a real estate litigation attorney with Chicago-based Jenner & Block, told CoStar News.
Negotiating force majeure provisions has taken on a new sense of urgency as attorneys and their clients track the progress of the first wave of lawsuits from tenants that seek to excuse or delay their lease obligations amid extreme financial hardship, McAteer’s Jenner & Block colleague on the litigation side, Abraham Salander, told CoStar.
In the early weeks of the pandemic, tenants, owners and their attorneys rushed to review their leases and push for new terms that include references to pandemics and civil unrest, he said.
“We immediately started seeing feuds between landlords and tenants from day one of the pandemic,” Salander said. “My phone was ringing off the hook. Emails were blowing up from clients, other partners in the firm and outside lawyers were calling to discuss issues. Tenants said they couldn’t pay rent and didn’t have to, and landlords pushed back.”
That burst of activity “has now swelled into this wave of ongoing issues that my clients are facing,” Salander added.
Burns said what stuck out to him was that, although leases weren’t much of a road map for navigating the crisis, most struggling retail landlords and tenants pulled together and worked out their own agreements on deferred or abated rent without needing to call in the lawyers.
“Landlords could see they were struggling and tried to become partners instead of playing hardball,” Burns said.
New Lease Terms
Force majuere clauses in property leases signed before 2020 typically defined fires, labor strikes, war or acts of terrorism, government prohibitions, natural disasters or other uncontrollable circumstances as being events that could free landlords or tenants from being liable for lease terms. Few of the clauses mentioned pandemics and almost all did not allow the abatement, extension or deferral of rent or other payments required by either party.
Now, attorneys have to grapple with whether a tenant can get rent full abated if a government order closes the doors to the business or whether they can get rent partially deferred if their capacity is reduced. For example, Crowe & Dunlevy’s Zack Allen negotiated changes to a lease between a hospital tenant and property owner that would require rent abatement if the owner receives forbearance from its lender in the event of a government-ordered lockdown of 10 or more consecutive days.
But many real estate attorneys are still trying to sort out exactly how force majeure clauses will change in coming months and years, said David Farren, an attorney with the Phoenix-based Jaburg Wilk law firm. The circumstances created by the pandemic have raised legal issues that are barely a year in the making and are difficult to analyze without the guidance of precedent-setting case law that hasn’t yet been established.
“Unfortunately, the courts have not had time to catch up to the COVID-19 pandemic,” Farren told CoStar News.
Many owners and tenants that haven’t yet added such lease provisions plan to do so, according to the survey of more than 300 recently signed commercial leases obtained from private sources by LexisNexis legal publication Practical Guidance Journal.
More than half the respondents whose force majeure lease clauses did not already include mention of pandemic-related events reported that they planned to renegotiate their leases to include one or more of those events in their contracts.
By Randyl Drummer