Common Landlord and Tenant Questions during a Force Majeure03.26.2020
March 26, 2020 — Recent developments concerning the Coronavirus (COVID-19) pandemic have raised a number of questions for landlords and tenants alike. We have prepared a summary of answers to some of the questions we are frequently being asked.
Q: Does the Coronavirus pandemic excuse a tenant from paying rent?
A: The law does not provide an automatic right to suspend rental payments because a tenant’s operations are restricted due to a pandemic or national emergency. Instead, a tenant remains obligated to pay rent absent a lease provision providing a right to suspend payments. Often, a lease may include a force majeure clause that suspends the landlord’s and/or tenant’s respective obligations during the pendency of an emergency. However, the mere inclusion of a force majeure clause does not necessarily mean the rent is suspended; Indiana law provides these clauses are interpreted under the basic rules of contract construction. As such, some force majeure clauses may relieve a tenant’s obligation to pay rent, while others do not.
Q: Is a tenant excused from performing non-monetary covenants because of the Coronavirus?
A: It depends on the specific covenant. For example, a lease provision that requires a tenant to continuously operate at the leased premises should be excused under the legal doctrine of impossibility of performance. In contrast, a governmental regulation prohibiting the operation of a restaurant would not excuse a tenant from adhering to a permitted use provision that limited the tenant’s use to operating a restaurant.
Q: If a landlord and tenant agree to suspend rent payments, does this agreement need to be documented?
A: The best practice is for a landlord and tenant to formally memorialize any agreement to suspend or modify rent payments. Leases often contain a provision requiring any amendment to the lease to be in writing. While this provision may be waived, having the modification agreement in writing avoids a potential argument about the terms or enforceability of the suspension or modification of rent payments. Additionally, failure to put the agreement in writing may also constitute a waiver of a landlord’s right to insist upon timely payments in the future. Although many leases contain “anti-waiver” clauses providing that acceptance of late rent does not waive a landlord’s rights, Indiana law provides that these anti-waiver clauses, too, may be waived through course of conduct, and thus do not provide protection from waiver arguments.
Q: Does the tenant’s business interruption insurance cover lost income arising from the pandemic?
A: Business interruption coverage is typically not provided as a separate policy, but instead is included in a property/casualty policy or as an endorsement to a comprehensive policy. In turn, most policies require that to be recoverable the lost income must arise from a cessation of business due to actual, physical loss to the leased premises such as fire or flood. Thus, coverage will generally not be available for losses arising from the pandemic. However, based on recent outbreaks of disease such as measles, insurers began writing policies that provide coverage for “interruption by communicable disease,” which may be applicable depending on the circumstance. Whether or not there is insurance coverage is dependent upon the specific terms of each insurance policy.
Q: What governmental resources are available to assist tenants whose businesses have been affected?
A: The U.S. Small Business Administration recently announced that it will provide targeted, low-interest disaster recovery loans to small businesses that have been severely impacted by the Coronavirus and do not have access to alternate credit. Affected businesses may qualify for working capital loans up to $2 Million at 3.75% fixed interest (2.75% for non-profits), with repayment terms extending up to 30 years. Applications for disaster recovery loans may be completed at https://disasterloan.sba.gov/ela/.
Q: What should I do?
A: If a commercial tenant has concerns about future business operations, the tenant should be proactive in discussing its concerns with the landlord. However, a tenant should be careful not to “repudiate” a lease agreement. For instance, a tenant should never tell its landlord that “I can’t pay rent” because the law provides that an unequivocal assertion that a party will breach a lease in the future may, under certain circumstances, constitute an immediate breach. Alternatively, a tenant could generically ask whether the landlord is willing to provide short-term relief arising from the pandemic.
With respect to commercial landlords, it is ultimately a business decision whether to provide tenants with relief. If a landlord is able to provide relief and chooses to do so, a landlord should reasonably expect concessions from the tenant, including a release of claims.
With the importance and complexity of these questions, it is imperative that you receive proper and timely advice. The attorneys at Katz Korin Cunningham are prepared to assist you in dealing with these issues. We invite you to contact Chris Trapp at 317-464-1100 or firstname.lastname@example.org Jeff Hearn at 317-396-2567 or email@example.com or any of the members of our Business and Real Estate practice group to discuss your specific situation and how we may be able to assist you.
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