How Does the Coronavirus Pandemic Affect Your Lease Obligations?
March 16, 2020
Are you a commercial tenant?
Has the coronavirus pandemic prompted you to consider temporarily closing your physical location?
Does your lease have a “continuous operations” provision?
If the answer to these questions is “yes”, here is what you need to know moving forward.
What is the Continuous Operations Clause?
Most commercial leases contain a provision that requires the tenant to be open for business for a minimum number of days during the week and a minimum number of hours during each day. For example, a lease may require the tenant to continuously operate its business at the leased premises for a minimum of eight hours per day, Mondays through Saturdays, and four hours per day on Sundays. Alternatively, if the space is located in a shopping center, the lease may require the tenant to continuously operate its business at the leased premises on all business days and during similar hours that the majority of stores in the shopping center are open for business.
In addition to the above days and hours requirement, some leases go even further to require that the tenant adequately staff its store and carry sufficient stock of merchandise, maintain displays of merchandise in display windows and keep display windows and all signs well lit during such required days and hours. In other words, the tenant cannot merely be “open” for business, but must continuously “operate” its business.
The purpose of a continuous operations clause is to ensure that the landlord’s property maintains a prosperous aesthetic. Store or office closures, whether temporary or permanent, could affect customer foot traffic at the landlord’s property, the business of neighboring tenants and the landlord’s ability to relet the space in the future.
Exceptions to the Continuous Operations Clause
Exceptions to the continuous operations clause are sometimes provided in the lease or are otherwise negotiated between the parties. They provide that the tenant is permitted to not continuously operate at the leased premises during certain events, such as periods of (1) construction, renovations or alterations, (2) damage or destruction due to a casualty, (3) eminent domain proceedings, (4) conforming to new local, state or federal governmental requirements, (5) national holidays, (6) inclement weather, and (7) force majeure events.
What is a Force Majeure Event and Can the Coronavirus Pandemic Be Considered One?
The term “force majeure” is defined differently in each and every lease. Some definitions are specific and list exactly what events will constitute a force majeure event. Particularly, (1) acts of God, (2) strikes, lockouts or other industrial disturbances, (3) acts of public enemies, terrorist acts or war, (4) acts, priorities or orders of any kind of the federal or state government or any of their departments, agencies, subdivisions, or officials, (5) any civil or military authority, insurrections or riots, (6) landslides, lightning, earthquakes, fires, hurricanes, storms, tornados, floods, washouts or droughts, (7) outbreaks, epidemics, pandemics, travel restrictions, quarantines or related governmental acts, (8) arrests, restraint of government and people or civil disturbances, (9) explosions, breakage or accidents to machinery, transmission pipes or canals, (10) shortages of labor or materials, (11) delays of carriers, and (12) partial or entire failures of utilities or shortage of energy.
Other definitions of “force majeure” are general and open-ended. Particularly, any cause or event not reasonably within the control of the party claiming such inability and not due to its fault and which, by the exercise of due diligence, such party is unable to prevent or overcome.
That being said, whether the coronavirus pandemic is considered a force majeure event, thereby excusing the tenant’s obligation to continuously operate at the leased premises, will depend on the language in the tenant’s lease.
Note that while a force majeure event may work to pardon the tenant from its continuous operation obligation, it will not pardon the tenant from its rent payment obligation unless the lease expressly states otherwise.
Consequences of Breaching the Continuous Operations Clause
If, at any time during the term of the lease, the leased premises is not open and the tenant’s business is not operated as required pursuant to the lease’s continuous operations clause (and no exception exists), the tenant will be deemed in breach of the lease and the landlord will be entitled to certain remedies.
Now, most landlords are reasonable and understand that it is not always possible to continuously operate – things happen. Therefore, leases generally provide that a breach will only occur if the tenant fails to continuously operate for a certain number of consecutive days; typically, thirty.
If the tenant does indeed breach the continuous operations clause, the remedies that the landlord will be entitled to will depend on the language in the lease. Examples include (1) the payment by the tenant of an amount equal to the tenant’s rent, prorated on a daily basis, for each full or partial day that the tenant is in breach (in addition to the normal monthly rent payable); (2) the landlord’s right to seek specific performance (i.e., obtain a judicial order compelling the tenant to perform its contractual obligations); and (3) the landlord’s right to terminate the lease and repossess the leased premises.
What Actions Should Tenants Take Moving Forward?
With the coronavirus being a harsh reality in the United States, and amid fears of a global pandemic, business owners and employers have started to request that their employees work remotely. While remote work may be good for the health of your employees, it is bad for the health of your relationship with your landlord.
Has the coronavirus pandemic prompted you to consider temporarily closing your physical location? If so, you should thoroughly review your lease before doing so. Pay particular attention to whether the lease contains a continuous operations clause, whether an exception exists and whether the exception covers the coronavirus pandemic we are now facing.
Some leases provide specific guidance as to what the tenant must do when faced with a force majeure event. For instance, the tenant may be required to give notice and full particulars of such force majeure event in writing to the landlord. If your lease provides instruction, proceed accordingly. If your lease is silent, however, engage an attorney to help you determine how to best move forward with your business.