As Californians settle into our “new normal” of remote working and the closure of all non-essential businesses, landlords are increasingly hearing from tenants who are feeling the economic effects of COVID-19.  This memo discusses some of the most common questions and possible resolutions for landlords as you move forward in these difficult times.

Rent

The most common question landlords are asking me is, are tenants excused from paying rent.  Generally, the answer is no.  The two most common scenarios which tenants are seeking to avoid paying rent are relief under government moratoriums and force majeure clauses. 

Eviction Moratoriums

Last week, Governor Newsom empowered local governments to place moratoriums on residential and commercial evictions.  On March 27, he issued an executive order banning the enforcement of residential evictions through May 31.  Many local governments have enacted moratorium that are broader and include commercial tenants.  For example, both the City and the County of San Diego, have approved temporary moratoriums on evictions for residential and commercial tenants who cannot pay rent due to loss of revenue as a result COVID-19.  [1]  Both require that the tenants provide written notice to their landlords and written proof that the inability to pay rent is due directly to the COVID-19 pandemic.  Additionally, the moratoriums provide that tenants must repay landlords at some later date, not that the rent is forgiven.  As further discussed below, the devil is in the details regarding these regulations as each municipality could have a slightly different ordinance in place and it is important to be familiar with the regulation that governs the particular property in question.

Force Majeure

Additionally, some tenants are sending out notices that they are invoking the force majeure clauses in their lease.  The first concern is whether a pandemic will trigger the force majeure clause. Courts tend to be very strict in interpreting force majeure clauses meaning that if the clause doesn’t specifically list “pandemic” as a force majeure, it may not be a valid reason for delaying performance.  However, most force majeure clauses do include “governmental shutdown” as a force majeure so those businesses which were required to close, such as bars, restaurants, and gyms, would be allowed to invoke force majeure.

Second, is that commercial lease clauses usually carve out nonpayment of rent as an item which can be excused by force majeure as provided in the lease.  In a typical force majeure clause, such as the one below, a pandemic may excuse a tenant from performing repairs or meeting certain deadlines (as discussed in more detail below), but would not excuse nonpayment of rent:

                “Force Majeure.  The occurrence of any of the following events shall excuse such obligations of Landlord or Tenant as are thereby rendered impossible or reasonably impracticable for so long as such event continues:  lockouts; labor disputes; acts of God; inability to obtain labor, materials or reasonable substitutes therefor; governmental restrictions, regulations or controls; judicial orders; enemy or hostile governmental action; civil commotion; fire or other casualty; and other causes beyond the reasonable control of the party obligated to perform.  Notwithstanding the foregoing, the occurrence of such events shall not excuse the financial obligations of the Tenant, including Tenant's obligation to pay Rent.”

In addition to the lease provisions, California Civil Code Section 1511 also provides an excuse for nonperformance or delay in performance due to certain factors such as operation of law or a “irresistible superhuman cause.”   Most leases deal with the concept of force majeure in much more detail than the code section and courts would likely look at the leases in conjunction with the code section before determining whether COVID-19 excuses payment of rent.[2] 

Other Implications of Force Majeure

Assuming that a pandemic is an act of God covered by the Force Majeure clause in a particular lease, then that clause may allow for a delay in certain areas that are beyond either party’s control without sending the delaying party into default.  Examples include a tenant invoking force majeure to delay opening, or to close its doors despite an operating covenant.   Landlords may be able to invoke force majeure to extend the deadline to deliver a premises, complete repairs, or even deliver CAM reconciliations.  Additionally, some clauses may require that written notice in order to invoke force majeure.  Because each lease and each set of facts is unique, landlords should carefully review their leases and consult legal counsel before acting.

What are the practical effects?

Importantly, as I mentioned above, none of the legislation passed so far relieves the tenants from the obligation to pay rent.  Instead, it delays payment and the landlord’s right to pursue the unlawful detainer remedy.  However, from a practical standpoint, many landlords will be dealing with tenants who simply do not have the money to pay rent.  In those cases, it may be that the landlord’s best business decision is to work with the existing tenants to get through these difficult times.  Not only would landlords have to wait to pursue evictions, once courts reopen, and moratoriums come to an end, there may be an increased case load as landlords are able to move forward with unlawful detainers making the process even longer, more costly, and likely more difficult than a standard UD proceeding.   Further, there may not be new tenants to move in and take over for the old tenants.

When landlords and tenants can come to an agreement regarding rent, or any other delay or nonperformance, those agreements should be in writing.  Things to consider include:

  • Will rent be abated or deferred? If deferred, for how long and what are the repayment terms? If abated, is there a due upon default clause?
  • Will the pandemic result in revised rent dates – if a tenant has a delayed opening does it affect lease commencement and expiration dates or rent commencement?
  • If the exact consequences of the pandemic are unknown, does it make sense for a landlord and tenant to document in writing their agreement regarding COVID-19 as it relates to Force Majeure.

Landlord Next Steps

Most importantly, in these hard times, communication is key.  Additionally, to the extent possible, when landlords can proactively prepare for tenant responses.  Here are few practical suggestions which landlords should consider:

  • Review their leases with counsel for implications of force majeure, or other relevant clauses.
  • Discuss governmental regulations on business closures and moratoriums on evictions with counsel to understand the landlord’s rights in case of tenant defaults.
  • Keep open communication with tenants to be aware in advance of tenant financial or other difficulties.
  • Document all agreements with tenants which modify either party’s financial or other obligations.
  • Discuss with their lenders any assistance or deferment lenders are offering to landlords whose tenants are not able to pay rent.
  • Sending correspondence to tenants to clarify the landlord’s position and to request information from tenants.

This is not the first time that the commercial real estate industry has had to deal with unique difficulties and with creativity, communication, and patience, our industry can come through this.  Again, each property, and each lease, is unique and this memo is for general informational purposes only. 

If I can be of any assistance, please feel free to call me directly at 619-325-1440 or email me at jswanson@cblg.biz.

 

Disclaimer: The foregoing is for general educational purposes only and does not constitute legal advice. Legal counsel should be consulted for application to specific circumstances.

 



[1] The Board of Supervisors for the County of San Diego passed a resolution which prohibits eviction of a residential or commercial tenant for nonpayment of rent due on or after March 4, 2020, if the tenant has provided notice to the landlord within 15 days after the date rent was due, or within 15 days after March 24, 2020, whichever is later, that the tenant is unable to pay rent due to financial impacts related to COVID -19.  The resolution goes on to allow a tenant through the end of August 2020 to pay rent owed (3 months following June 1), plus one additional month if the tenant can provide further and continued documentation of the financial impact.

[2] For detailed discussion of the statute see http://www.cblg.biz/resources/force-majeure-and-covid-19/