By Matt Viola & Steve Richman
While the safety of your family and friends is obviously the most important issue in these unprecedented times, the coronavirus (COVID-19) will absolutely impact your real estate projects. The following is a list of some major issues that we anticipate will arise for many of your leases.
It is very likely that your lease agreements do not contain the terms “Coronavirus,” “COVID-19” or even “pandemic.” If you are a landlord, be prepared for a surge of tenants arguing that they can’t pay rent or deserve a reduction because of the current situation. First, you will need an experienced attorney to review the lease agreement. The first place to look is the “force majeure” clause, if you have one. Has a force majeure event, as defined in the lease, occurred? “Pandemic” is not likely listed, but certainly, Ohio’s recent order closing restaurants and bars is a “restrictive government action.” Depending on the language in the clause, for example, a landlord may be able to delay its tenant improvements if the city building department has closed for 30 days. Similarly, if the clause does not exempt late rent payment, a tenant may be able to postpone paying rent until business is back to normal.
What if there is no force majeure clause and you are a tenant who can’t continuously operate or a landlord who can’t give its tenants possession and quiet enjoyment, due to a quarantine situation at the premises? Are “all bets off?” Not necessarily. Leases are not only transfers of property interests, but also contracts. Therefore, basic defenses to contract performance are almost always held to be applicable to leases. Accordingly, the defenses of “impossibility” and “impracticability of performance” can be potential defenses to a claimed breach of lease.
When is contract performance legally impracticable? After a contract is made, a party’s performance can be held “impracticable” without its fault “by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made, [and in such case] its duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.” Since the non-occurrence of a pandemic was probably not assumed by the tenant and landlord in my example, the defense of impracticability would probably not be available. It has been held that the defense of “impossibility,“ however, can be a valid defense to contract performance where an unforeseen contingency occurs after the contract is executed and makes it impossible to perform, without a “basic assumption requirement,” as is the case with impracticability.
Generally, one of the ways contract impossibility can occur is when performance of the promise becomes illegal after the contract is made. The defense of impossibility utilizes an objective standard, however, which means that performance will only be excused if it would be impossible for any reasonable party to perform its obligations under the contract. In our example, it seems that the quarantine order would make it illegal for the tenant to continuously operate, and make it illegal for thelandlord to grant possession/quiet enjoyment. While the defenses of impracticability and impossibility have been narrowly applied by courts, over the years, good advocacy is always the best medicine for convincing courts to widen the gap.
Can “Frustration of Purpose” terminate a tenant’s lease? Frustration of Purpose is caused by an event which excuses nonperformance of a lease because the event substantially frustrates the objects contemplated by the parties when they entered into the Lease. This may become a prevalent assertion by restaurant tenants in Ohio who are now limited to carry out only; such tenants may claim the coronavirus has brought on a nationwide economic crisis, entitling restaurant tenants to be excused from performing their obligations under their leases. Similar arguments were raised during the 2009 economic crisis. Although relatively untested in this type of situation, we think it will be a complicated argument to allow the termination of a lease. The reality is that landlords and tenants need to work together at this time of crisis, so now may be a great time to modify the current lease agreement.
Cleveland has just joined cities such as Philadelphia, San Francisco, New York and others who have instituted moratoriums protecting renters from being evicted. The City of Cleveland will suspend evictions “caused by economic hardship resulting from the coronavirus pandemic,” city council president Kevin Kelley announced Tuesday afternoon. Legislation is expected to be passed at next week’s city council meeting. While more and more cities in Ohio and elsewhere jump on the “postpone evictions bandwagon,” State Rep. David Leland (D-Columbus) is expected to introduce legislation to stop public utilities from cutting service to ratepayers and prevent evictions from occurring during the COVID-19 crisis throughout Ohio. According to Leland, “Because of these closings, innocent people are going to be unable to pay their bills – we’re asking utility companies and landlords not to penalize them for it.” The reality is that most areas of the Country will likely have moratoriums on evicting residential tenants.But does that apply to commercial property as well? We believe that, although it may not be the best time to commence an eviction against a commercial tenant, the actions taken by governments and the courts do not apply to commercial tenants.
If you have questions regarding how COVID-19 may impact your lease agreements, reach out to Matt Viola at firstname.lastname@example.org or 216.736.7253 or Steve Richman at email@example.com or 216.736.7203, or contact any of our Real Estate professionals.