Retail landlords and tenants are experiencing unprecedented problems due to COVID-19. In many instances non-essential retailers have been required to shutter, part of the social distancing implemented to slow the spread of COVID-19. For example, New Jersey Governor Phil Murphy has required that all indoor shopping malls in the state close, as the government continues efforts to slow the spread of COVID-19. Jurisdictions such as San Francisco promulgated shelter-in place orders to further effectuate social distancing.
The relationship between retail landlords and their tenants is governed by the terms of their individual leases. Leases come in all shapes and sizes, differing from one landlord to another and from one tenant to another. Some are heavily negotiated, with the final product bearing little resemblance to the landlord’s initial draft. These heavily negotiated leases are the product of landlords and tenants pursuing the most favorable possible contract.
This substantial investment is understandable, with monetary and non-monetary terms often being material to both parties. Regardless of their respective skill levels, or the resources invested in the negotiation, few if any lease negotiators anticipated a pandemic or its consequences.
The Applicability of Force Majeure Will be Determined on a Case-by-Case Basis
Notwithstanding the unprecedented problem presented by COVID-19, there are contractual provisions which may apply, and whose applicability will be tested in the coming months. Such provisions include force majeure. Force majeure clauses excuse a party’s non-performance when extraordinary events prevent a party from fulfilling its obligations. Force majeure has the potential to excuse non-performance when such non-performance stems from causes beyond the party’s control.
The events constituting force majeure are identified in the contract, and can be narrowly circumscribed. The applicability of force majeure rests on the specific language agreed to by the parties, requiring careful scrutiny and parsing of the language and the performance sought to be excused. Generally, both landlord and tenant assume the risk of their own inability to fulfill contractual obligations, except when the contract provides otherwise. Consequently, courts apply an objective standard when ascertaining whether the performance in dispute is impossible or impractical; the party’s subjective ability simply isn’t relevant. Of course, there are other legal theories that can be brought to bear, but that isn’t or shouldn’t be the issue.
COVID-19 Presents an Unprecedented Threat
We are confronting an unprecedented threat. According to highly respected Harvard Professor David Sinclair, experts from Stanford on the front lines indicate that COVID-19 cases will not peak until July 2020, with a total number of deaths in the USA ranging up to 500,000 to 1 million. Also according to Professor Sinclair, we expect a doubling of cases every six days. That means we are looking at 1 million cases by the end of April. Then 2 million by May 7th. Then 4 million by May 13th.
The Pressure on Retail Landlords and Tenants Pre-Dates COVID-19
We are confronting unprecedented challenges. Even before COVID-19 many retail landlords and tenants were under pressure, perhaps exemplified by Simon Property Group’s and Brookfield Property Partner’s acquisition of Forever 21, and Vornado’s agreement to reduce Forever 21’s rent at 1540 Broadway, Times Square, by more than 50%.
The Interests of Retail Landlords, Tenants, Lenders and their Employees Are Inextricably Intertwined
Lease restructuring is a complex issue, often requiring the consent of the landlord, tenant and one or more lenders. The interests of these parties are inextricably intertwined. Restructuring can take place in a manner that optimizes value for all, allowing each to vigorously pursue their respective interests and fulfill their fiduciary duties.
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Copyright 2020 Exceedant LLC and Author: Randy Airst, CEO at Exceedant
Notice: This post is not intended to be legal or investment advice. No legal or business decision should be based in whole or part on this post.