Caythar Nene

COVID-19 has had a devastating impact on several different industries, and commercial real estate in Boston is no exception. With rents coming due in the first week of May, many landlords and tenants are asking the same question: Is the rent still due?  

As retailers look beyond furloughs and layoffs for other ways to cut expenses, some are looking at rent payments. David Overton, CEO of the restaurant chain The Cheesecake Factory, sent a letter to the landlords of its nearly 300 locations saying, in effect, that due to a severe decrease in cash flow they would not be able to make April rent payments. The letter went on to say that “…while we hope to resume our rent payments as soon as reasonably possible, we simply cannot predict the extent or the duration of the current crisis.”  

Before espousing this approach, tenants would do well to remember that if they do not pay rent, they risk exposing themselves to termination, acceleration of rent and possibly eventual eviction. 

Retail, Office Tenants Differ 

Landlords with retail tenants need to keep in mind that as it stands there is a moratorium on evictions in Massachusetts until at least April 21. Further, there is no incentive for a landlord to evict because there are no other alternative retail tenants in the market right now and the universe of viable tenants in the future may be significantly smaller.  

Practically speaking, the best solution may be for both the landlord and retail tenant to work out some shared allocation of risk where, for example, the tenant pays some percentage of the rent and the reduction gets amortized over the remaining term of the lease. Some landlords are also looking to extend terms in exchange for rent abatements. 

Tenants renting commercial office space have an alternative not available to retail tenants in that they may have the ability to have employees work remotely and therefore still produce at least some revenue.  

Some tenants may infer that while teleworking, they are paying rent for unused office space and seek rent forbearance or relief to mitigate decreased revenue. They would do well to remember that leases rarely if ever include decreased revenue as a reason for non-payment of rent. On the other hand, while landlords may not be initially open to such discussions, with the moratorium on evictions most would be wise to work with their tenants.  

Solutions similar to those discussed regarding retail tenants may be found wherein the office tenant agrees to pay a reduced amount of rent and pays the unpaid rent and interest amortized over the remaining term of the lease.  

Contractual Recourse Options 

Landlords and tenants alike are reexamining their leases to understand their options in this situation. The two most commonly examined lease provisions are force majeure and the scope of required business interruption insurance. 

Force majeure clauses allow for the parties to be excused from some of their contractual obligations if a certain event outside the parties’ control and ability to foresee makes it impossible for the parties to carry out those contractual obligations.  

Force majeure interpretations often rely on explicit mention of the particular event in question. Pandemics rarely are expressly included in force majeure clauses outside highly specialized contracts such as ones addressing infectious diseases aboard a ship. However, government orders like Gov. Charlie Baker’s that non-essential businesses have to close, provided landlords keep buildings open, generally fall within the definition of a “force majeure event.”  

The extenuating circumstances specified in a force majeure clause might excuse a tenant from a continuous operations clause in the lease but are generally written so as not to be an excuse for not paying rent.  

Some commercial landlords also require their tenants to carry business interruption insurance to ensure that they are paid rents in case a tenant’s business becomes inoperable. Most such policies require that the interruption be due to property damage like a casualty that physically damages the building (which is not the case in a pandemic), and most such policies exclude things like viruses as a covered event.  

A Better Alternative  

Remember in 2008 that many businesses closed due to the financial meltdown, but in commercial contracts like leases, the courts generally enforced the allocation of risk as written by the parties. As a legal matter, in most cases the duty to pay rent remained. The current pandemic is an unprecedented situation so things may be different this time. Regardless, the essential takeaway is that contractual avenues will involve prolonged litigation and prove costly for both parties.   

Though not apparent now, the COVID-19 crisis will at some point be in our rearview mirror, and sound business relationships are the roadmap to the future. It is in the interest of both landlords and tenants to negotiate an equitable solution that works for both parties during this difficult time.  

There is much uncertainty around the duration and scope of this crisis and, consequently, deferred rents, installment payment plans and the application of security deposit with a promise to replenish after the tenant resumes operation or any such mutually beneficial plan are infinitely preferable to unilateral win-lose positions or extended court battles that break productive long-term relations.  

Caythar Nene is an associate at the Boston law firm of Dain, Torpy, Le Ray, Wiest & Garner, P.C.