How to Use Your Lease to Limit Coronavirus Disruption, Damage & Liability

We’ll look at three coronavirus scenarios and the lease clauses you can use to address them.

The coronavirus has taken the world by surprise. And that includes commercial landlords and tenants. But there’s a big difference between lack of warning and lack of preparation. And you may be more prepared than you realize. Thus, while it may be too late to incorporate coronavirus protections into your existing leases, there’s still time to salvage the situation by relying on the provisions that your leases do contain.

We’ll look at the three most pressing concerns the coronavirus is likely to pose and the lease clauses that you can use to address them and minimize coronavirus damage and disruption. Also, to assess how effective your lease is for coronavirus response, we’ll give you a Checklist: Ask 23 Questions to Assess Your Lease Coronavirus Response Rights.

SCENARIO 1:

FULL OR PARTIAL BUILDING SHUTDOWN BY LANDLORD

The first risk is that you’ll have to shut down part or all of your building, facility, or shopping center due to coronavirus. There are two likely scenarios:

• The government orders the shutdown as part of a coronavirus quarantine or other public health response action, which has already happened in some parts of the country; or
• You have to initiate the shutdown as a result of staffing, supply, or service disruptions or shortages.

Needless to say, the resulting measures you implement to keep tenants out of the property would be a direct violation of tenants’ quiet enjoyment, use, and other lease rights. The question then becomes whether tenants can withhold rent, terminate the lease, or invoke their other lease remedies. The answer depends on whether your lease includes provisions justifying your actions in shutting down or limiting access to the property.

The Emergency Access Limitation Clause

First, check your lease to see if it allows you to take appropriate response actions during a public emergency. Many landlords began negotiating for the inclusion of such clauses in the aftermath of the 9/11 terrorist attacks and previous infectious illness outbreaks like SARS and H1N1. Where such clauses do exist, they typically allow the landlord to deny or restrict access to the premises to deal with the emergency.

Model Lease Clause

Landlord shall have the absolute right at all times, including an emergency situation, to limit, restrict, or prevent access to the Building in response to an actual, suspected, perceived, or publicly or privately announced health or security threat.

The Emergency Service Interruption Clause

Another key public emergency clause contained in some leases relieves the landlord of liability resulting from full or partial disruption of building services beyond its control.

Note, though, that public emergency rights clauses aren’t a panacea. Landlords still must exercise those clauses reasonably and in good faith. This is an implied legal obligation that exists regardless of whether it’s actually spelled out in the lease.  

The Force Majeure Clause

The other potential source of lease protection in the event of shutdowns or service disruptions is a force majeure clause excusing the landlord from performing its lease duties if a catastrophic event happens. The three key questions:

Does your lease have such a clause? Unlike the public emergency clauses discussed above, the force majeure clause is a boilerplate provision typically found in the back of many, if not most, commercial leases.

Is the coronavirus a force majeure event? Regrettably, the force majeure clause doesn’t usually get the attention it deserves until a public emergency occurs. And that’s where we are now. So, the first thing you need to look at is whether the coronavirus emergency counts as a “force majeure event.” The definition typically includes natural disasters, acts of war, labor strikes, and government actions. That’s good news if the shutdown is ordered by the government, but invoking the clause may be much more problematic if you initiate the shutdown, especially if you could and should have prevented the problem—for example, by making plans to deal with staff shortages and service and supplies disruptions.

What relief does the clause give you? A force majeure may either end or just suspend a landlord’s duty to perform.

SCENARIO 2:

LIABILITY TO TENANT STEMMING FROM INFECTION IN BUILDING

Another legal risk is that tenants will bring claims against you for failing to take adequate infection control measures in the common areas, especially if their employees, visitors, clients, or customers come down with coronavirus. Theoretically, a landlord could be held liable for negligence resulting in illnesses that people on the premises contract. But these cases are extremely hard to win given the difficulty of showing the link between the alleged negligence and the victim’s illness; this is doubly true for an illness about which so little is still understood like coronavirus.

However, tenants might have a stronger case in arguing that a landlord’s inadequate coronavirus control constitutes a lease violation. The strength of these claims would probably turn on two key lease provisions dealing with indoor air quality (IAQ) issues.

“As Is” Clause

Although coronavirus hasn’t yet spawned any reported case rulings, we know from previous litigation that lease clauses requiring tenants to take the space “as is” cut the legs out from under tenant IAQ claims. And while coronavirus didn’t exist at the time the lease was signed, the “as is” clause can shield landlords from tenant coronavirus claims based on the inadequacy of the HVAC and maintenance and cleaning systems.

Model Lease Clause

Tenant has fully investigated the condition of the Premises or waived its right to do so and is fully familiar with the physical condition of the Premises and every part thereof, including but not limited to the indoor air quality (IAQ) generally and the HVAC system, and Tenant accepts the same “as is.”

Lack of Representations or Warranties

The second layer of IAQ claims protection that your lease may contain is a provision expressly stating that the landlord makes no representations or warranties about the condition of the space or the IAQ in particular.

Model Lease Clause

Landlord has made no express representations or warranties and disclaims any implied representations or warranties relating to the condition of the Premises and common areas, or any part thereof, including, but not limited to, the HVAC and other building systems, the IAQ within the Premises and common areas, and the environmental condition of the Premises and common areas. Tenant agrees that Landlord shall not be liable for any patent or latent defects therein.

The flip side to the above analysis is that your legal risks for lease-related coronavirus infection claims will be greater if you do, in fact, include warranties about the IAQ of the property and common areas and the fitness of your HVAC, cleaning, and maintenance systems.

SCENARIO 3:

TENANT CLOSES DOWN OR RESTRICTS OPERATIONS

The third scenario, which is especially problematic in a retail setting, is that coronavirus will force the tenant to shut down or curtail its operations. Here’s a look at the key lease clauses that will determine your rights and remedies in this situation.

The Force Majeure Clause

Force majeure clauses may run in both directions and excuse not only the landlord but a tenant’s performance under the lease. The questions to ask if a tenant relies on the force majeure to justify a business closure or interruption are largely the same as the ones relevant to a landlord’s shutdown of the property:

• Is there a force majeure clause in the lease?
• If so, does it cover the tenant?
• Does the coronavirus emergency meet the lease definition of a “force majeure”?
• If the answer to all of the above questions is YES, which tenant duties does the force majeure clause excuse? Thus, for example, force majeure clauses excusing tenants may not apply to fundamental lease duties such as:
  •  Paying rent;
  • Maintaining the required insurance; and/or
  • Surrendering the premises at the end of the lease term.

Finally, consider whether the tenant follows the required notice provisions in invoking the force majeure clause.

The Continuous Operation Clause

Shopping center and retail leases in which tenants pay a percentage of sales typically include a clause requiring the tenant to continue its operations and restricting its rights to close down. If your lease does include such a clause, the first thing you need to check is whether there’s a carve-out for public emergencies and whether coronavirus qualifies as such an emergency. You also need to ensure that the tenant follows the lease notification and consent requirements and procedures.

Keep in mind that continuous operations clauses may not provide you with much practical protection if the tenant closing down doesn’t have any assets or a parent or related entity with deep pockets.