The Time is Right to Revisit Retail Lease Provisions in Light of COVID-19
Many retailers were forced to close their doors to customers beginning in March 2020, when the coronavirus pandemic first hit the United States. This caused the stock market to plunge initially, and pushed the overall economy into a record slump. Unsure of how to proceed given the unprecedented situation where municipalities were ordering stores to close, landlords and tenants turned to their leases and carefully sieved through them to determine their rights and obligations. As both parties sought to clarify their contractual responsibilities, several key lease provisions, such as force majeure clauses, insurance provisions and operating covenants, warranted careful scrutiny in light of the impacted retail landscape.
Seven months into the pandemic, many of those issues aren't fully resolved and most businesses are not running at full steam. Yet, the time is right for landlords to analyze key lease provisions such as force majeure and common area clauses to prepare for future deals that will likely take place in the context of an uncertain and unstable landscape.
The most obvious provision in a lease that will require attention is the so-called “force majeure” or “act of God” provision. This provision typically includes a list of specific force majeure events, usually defined as events or occurrences that the parties do not control. If there's a force majeure event, the party who is obligated to perform is excused from such performance. This “tolling” tends to be for the number of days such party is prevented from performing.
Prior to COVID-19, it was relatively rare to find a force majeure provision that included pandemics, viral exposures and related outbreaks as events that would result in the obligations of the parties being tolled. However, going forward, such events should be included in force majeure provisions, and rightly so. A force majeure provision that references “government-imposed restrictions” is likely broad enough to include “shelter-in-place” and “safer-in-place” type orders that require businesses to close, but it may be prudent to specifically reference such orders.
Landlords may want to require tenants to provide notice that they're making a claim under the force majeure provision, and to try to cap the amount of time that such force majeure tolling is effective. If possible, landlords will want to require that, under all circumstances, tenants continue to be obligated to pay rent (including triple net charges), even during a force majeure event like a pandemic. As landlords are acutely aware, rent payments are a critical component of the tenant’s bargain to lease and occupy space, and many landlords rely on the tenant’s covenant to pay rent in order to cover debt payments to lenders and otherwise keep their projects running.
Use of Common Areas
Landlords should make sure that the control of common area language found in most leases is broad enough for landlords to respond and adapt to pandemics and similar emergencies. For instance, landlords may need to install items to improve health and safety conditions and make other changes to the common area that may not currently be foreseeable to comply with recommendations or requirements of the CDC, WHO, or state or local authorities. As a result of physical distancing and store-capacity requirements, tenants may need the right to use portions of the common area, such as sidewalks, for customers to form lines outside stores.
In addition, restaurant owners may need the right to use part of the common area for seating for their customers if requirements don't allow them to provide tables inside for customers to eat. Landlords should do their best to work with tenants, where appropriate, to allow for the use of the common area for queuing and outdoor seating, as the ability to use such areas could be vital to the success of the applicable tenant.
Nevertheless, a landlord can condition such use upon the tenant fulfilling certain conditions, such as giving the landlord prior written notice of such intent and the expected duration, peak times and specific area the tenant wants to use. Additionally, landlords may want to specifically require that the tenant cleans up the area used for queuing and/or outdoor seating on a daily basis.
While force majeure and use of common areas are a great starting point when addressing lease revisions following the current pandemic, many other provisions also deserve a closer look. Landlords should work with counsel to review their existing leases to ensure that they're in a better position to respond and react to the “new normal” that will exist until a vaccine becomes available.
Dan Villalpando is a partner at real estate-focused law firm Cox, Castle & Nicholson LLP. His practice focuses on retail development and commercial leasing.
Dan Villalpando is a partner at real estate-focused law firm Cox, Castle & Nicholson LLP. His practice focuses on retail development and commercial leasing. Commercial developers look to Dan for his counsel on all aspects of shopping center development, including the acquisition and disposition of commercial real estate and the negotiation and drafting of development agreements, reciprocal easement agreements, declarations and major tenant leases. He can be reached at firstname.lastname@example.org.