COVID -19's Effects on Real Estate Law part-1, 0621 COBJ, Vol. 50, No. 6 Pg. 28
| Author | BY RONALD GARFIELD, J. |
| Position | Vol. 50, 6 [Page 28] |
FEATURE REAL ESTATE LAW
Commercial Leasing in a Post-Pandemic World
BY RONALD GARFIELD, J.
This three-part series examines how COVID-19 and associated legal developments have affected real estate law. Part 1 features commercial leasing, part 2 will cover business interruption insurance, and part 3 will provide an update on eviction law in light of the pandemic.
In his book Ten Lessons for a Post-Pandemic World,1 Fareed Zakaria postulates that the world today and the world to come make pandemics more likely. The continued encroachment of human activity into animal habitats, urbanization, global travel, animal agriculture, climate change, deforestation, and biodiversity loss have created a perfect storm for animal-to-human transmission. Many commentators hypothesize that the COVID-19 virus passed zoonotically from bats to humans, or from bats to an intermediate host species and then on to humans.2 An alternative theory is that the virus escaped from a laboratory in Wuhan that conducts research on bat corona-viruses.3 The World Health Organization has not yet endorsed any theories on the source of COVID-19 and continues to investigate. Lessons learned from the COVID-19 pandemic and earlier pandemics, such as the importance of social distancing, masking, and now rapid testing, coupled with our ability to produce vaccines in record time, will certainly make a difference in the fight against future viruses. But these practices provide no assurance that the world is safe from another pandemic.
Hopefully, by the end of the year, the economy will emerge from this pandemic, but it is unknown whether business as usual will return or if relationships such as commercial leasing will change significantly. The possibility of a future pandemic or a wave of a mutated COVID-19 virus beyond the scope of currently available vaccines may affect how parties negotiate leases going forward. Most leases already address the rights of parties regarding potential future events such as condemnation, force majeure, casualty loss, and assignment or subletting. But these provisions are typically silent on pandemics. This has forced parties to seek redress for pandemic losses under force majeure provisions, which has resulted in numerous disputes over the scope of these provisions. It thus makes sense for practitioners to address now the respective rights and obligations of parties to commercial leases in the event of pandemics and similar events.
This article discusses the COVID-19 pandemic's effect on relationships between landlords and tenants in a commercial setting with a focus on retail tenants, including restaurants.4 Related topics such as the Payroll Protection Program (PPP), COVID-related ligation, and WELL Building Standards are also covered. Portions of this article may be helpful in considering other lease relationships, such as those for office or residential space, and lender accommodations and insurance coverage for lost rents or profits, but they are not the main focus.
Pandemic Effects on Leasing
The COVID-19 pandemic caused a seismic shift in day-to-day workings between landlords and tenants. Governmental actions like shelter in place, lockdowns, capacity limits, required outdoor dining, and moratoriums on evictions became the order of the day. Some tenants simply stopped paying rent because they could not do business. Landlords could not evict tenants for nonpayment of rent because some courts would not entertain eviction actions, and some county sheriffs refused to process or serve any summonses in forcible entry and detainer actions. To address COVID-19 conditions, many leases were amended to forgive or defer rents, or some combination of both.
In the wake of government orders and consumer behavioral changes intended to slow the spread of COVID-19, some estimate that retail sales plunged nearly 20% from February to April 2020, and specific industries such as clothing and accessories and department stores suffered even worse.5 Restaurants in particular have struggled to stay afloat. In December 2020, the National Restaurant Association (Association) wrote to members of Congress outlining some impacts of COVID-19 on the restaurant industry. The Association reportedly surveyed 6,000 restaurants, 87% of which reported a drop in revenue of at least 36%.6 The Association also noted its estimate that by December 2020 up to 110,000 restaurants would close permanently or for a long term due to COVID-19 and its attendant impacts on dining out.7
The lessons learned during the COVID-19 pandemic will no doubt become a focus in future lease negotiations. Pre-pandemic commercial leases did not concentrate on force majeure provisions, many of which do not even expressly mention pandemics, public health orders, or epidemics. Rather, force majeure clauses typically list events such as floods, labor disputes, acts of God, wars, and civil unrest, with most stating that the occurrence of such events does not excuse timely payment of rent and providing relief only for non-monetary obligations such as business hours. The terrible toll that the pandemic has taken on businesses large and small, many of which were already struggling to compete with internet retailers, will surely give survivors pause if a new lease does not address pandemics as something very different than just another force majeure event. Landlords may also think twice about evicting responsible tenants or soften their attitudes toward tenants who encounter problems not of their own making.
Congress Responds
At the outset of the COVID-19 pandemic, Congress responded with a flurry of legislation, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Notably, the CARES Act established the Payroll Protection Program (PPP), which is now into a second round of authorization from Congress and continues to provide qualified small businesses with funds to pay payroll costs, including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The funds are provided through grants (i.e., loans to be forgiven) administered by die Small Business Administration.
Some landlords insisted, as condition of rent relief, that eligible tenants apply for a PPP loan and use a portion of their loan proceeds for rent. Yet some of these same landlords simultaneously pursued PPP loans for their own property management companies, making insurance claims for lost rents or seeking loan modifications from their lenders, all without considering how such efforts, if successful, could allow for more equitable treatment of tenants. On the other hand, some tenants demanded that eligible landlords apply for PPP loans to meet their mortgage obligations in the face of rent shortfalls.
State Approaches
States also reacted to the pandemic with legislative remedies. Some states, for example California, did not hesitate to legislate far more aggressively than Colorado to protect commercial tenants. California SB 91, as extended, prohibits landlord legal proceedings to collect past due rent or evict commercial tenants until June 1, 2021; it converts past due rents to a simple civil debt, the nonpayment of which cannot be the basis of an eviction action; and relying on federal funds, it allows landlords compensation for 80% of lost rents if the remaining 20% owed by the tenant is forgiven.8 Eligibility for these federal funds is based on income and COVID-19 impact: Any unpaid rent must be owed by an individual making less than 80% of the area median income for the calendar year 2020, or at the time of the application, and applicants must attest, underpenalty of perjury, that they have suffered hardship as a result of COVID-19.9 The desired impact of SB 91 is to incentivize local governments to follow the state's guidelines regarding fund distribution established in the bill.10 Local governments that opt to establish their own distribution system will not receive any further tenant assistance funding from the state.11
There has been no Colorado legislative response for commercial tenants. However, Colorado has provided some landlord relief for qualifying residential properties for qualifying tenants that are unable to pay rent by reason of COVID-19 under the Property Owner Preservation Program (POP).[12] Under POP, landlords apply for assistance on behalf of their tenants only.13 To qualify, the property must not be in foreclosure, must meet basic health and safety requirements, and must have rents below the POP maximum, which varies by county.14 For example, the maximum allowable monthly rent for a one bedroom rental in Denver County is $1,874 as compared to Kit Carson County, at the far eastern border of the state, where the maximum is $1,106.15 Reasonable fees described in the lease are eligible for reimbursement, excluding late fees, legal fees, and fees related to insufficient funds.16 Landlords and tenants who are related are not POP eligible.17 Tenants are also eligible for rent assistance in Colorado through the Emergency Housing Assistance Program (EHAP).[18] EHAP differs from POP in that tenants are responsible for their applications.19 While POP eligibility is based on number of bedrooms, EHAP eligibility is based on size of the household.20 To use the same counties for comparison, a single individual in Denver and Kit Carson counties making under $54,950 and $39,800 per year, respectively, is eligible.21 Units already receiving rental assistance through a voucher program are not EHAP eligible.22
COVID-19-Related Litigation
Notwithstanding attempts by the federal and state governments to provide economic relief, litigation over leases...
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