Client Alert: COVID-19 and Commercial Real Estate Leases
We are increasingly receiving inquiries from clients who want to know if they can stop paying rent under their commercial real estate leases as a result of the impact of the COVID-19 pandemic on their business operations. The answer, not surprisingly, is that it depends on the specific language set forth in the tenant's commercial real estate lease as well as the applicable law in the jurisdiction that governs the lease and the landlord/tenant relationship.
As a general rule, the “standard” commercial lease provided by most landlords typically does not contain provisions that would allow a tenant to withhold rent payments as a result of the effects of COVID-19. However, under certain circumstances a legal justification for withholding rent can exist. For example, if (i) a tenant's lease expressly states that the tenant may stop paying rent if the tenant is denied access to the leased premises and cannot operate its business in the leased premises, and (ii) circumstances exist such as a government order that prohibits the tenant from occupying its leased premises due to COVID-19, then, absent other overriding language in the lease to the contrary, a basis might exist for a tenant to withhold rent for the period when the leased premises have been closed for business due to the governmental order. In addition, while typically difficult to establish, there may be certain legal theories that can be interposed as a defense to the payment of rent under a commercial lease depending upon the severity of the situation and the language in the lease.
There is not a “one size fits all” answer to the question of whether a tenant can withhold rent from its commercial landlord due to the effects of the COVID-19 pandemic. Generally speaking, in our estimation, most commercial leases typically do not contain the language and protections that are necessary to permit the tenant to stop paying rent; however, a review of the specific set of facts, circumstances and the lease is required in order to provide an individualized answer to the question as every lease is different as well as the specific set of circumstances that may apply to it. Landlords and tenants should seek legal advice and have their attorney review their lease to ascertain their legal rights and the options that they may have available to them.
In addition to exploring whether there is a basis for withholding rent under a commercial real estate lease, businesses should also review their insurance policies to ascertain whether their inability to operate their business as a result of the impact of COVID-19 would be a covered event under any business interruption insurance or contingent business interruption insurance that they may carry. Business interruption insurance and contingent business interruption insurance typically insure against the loss of revenue due to the interruption of an insured’s business which is caused by an insured peril. For those businesses that carry business interruption insurance and contingent business interruption insurance, a careful review of those policies and its exclusions should be undertaken by the business in consultation with their legal counsel to ascertain whether a basis for the filing of a claim exists.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.