The COVID-19 Pandemic: Strange Times Call for Action
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by Gavin I. Handwerker, Esq. and Carl Salisbury, Esq.
Right now, New Jersey is in a virtual lockdown with only essential businesses being allowed to remain open per Governor Murphy’s Executive Order 107 signed on March 20, 2020. As a community, we are venturing into unchartered territory and many of our commercial clients, landlords and tenants alike, have reached out to us asking where do we go from here and what are their respective rights under their leases.
As one of us always likes to say, every problem has a solution; and with so much information, misinformation, hysteria, and rumor traveling around in these fluid times, the best advice we have for all of our commercial clients is to listen more than ever and talk solutions through.
We are going to emerge from this crisis and hopefully continue on in some kind of new normalcy – what you do not want to be doing at this moment is laying the foundation of mistrust and anger with your business counterpart.
So, where do commercial landlords and tenants go from here? Below is a useful guide to get on track:
If you have yet to look at your commercial policy, do it; and do it right now. It is astounding how many times clients and potential clients call and tell us that they have no idea what their insurance policy covers.
Does your policy have business interruption coverage? If you do, you may be surprised to learn that your insurance company may take the position that coronavirus claims should not be covered. Litigation is already underway to test that theory, and we believe that corporate policyholders will ultimately prevail on their claims to collect on this coverage.
Business interruption coverage is triggered when a covered cause results in physical loss of, or damage to, covered property. In New Jersey and in some other states, “physical loss of property” can include loss of use, loss of access, and loss of functionality. Unlike a fire, coronavirus-related claims are unlikely to cause a physical alteration of property, but coverage may be triggered by the loss of use, access, or functionality of a business premises. In most instances, your commercial policy will also have an exclusion for things such as bacteria, viruses, and other pollutants. This does not necessarily mean, however, that business closures from the recent Executive Orders will be excluded. We recommend consulting with an attorney who knows insurance coverage law, and who has experience reviewing these policies, to determine your rights. Most policies have very tight time requirements for providing notice of a claim, so don’t put off having your policies reviewed for this coverage.
For New Jersey’s commercial landlords and tenants, there is a new wrinkle to the insurance coverage question because of proposed legislation to address this exclusion in most policies. The bill – New Jersey Bill A-3844 – provides a method for businesses that endure business interruption losses due to coronavirus to recover those losses from their insurer. If enacted, the law will be retroactive for any insured with a business interruption policy in place from March 9, 2020. The bill would apply to New Jersey businesses with fewer than 100 eligible employees, meaning full-time employees working a normal week of 25 hours or more. The purpose of this article is not to debate the merits of the legislation, which can certainly be a topic for discussion on its own. It is, something to be aware of and to keep a keen eye on in the coming weeks.
The attorney that drafted your commercial lease knows what it says – because they drafted the document; but do you know what it says? Sure, you may know the very basics of your lease, such as when the rent, additional rent, and CAM are due; but do you know if your lease allows you to stop paying rent in times of a government-mandated shut down? If you do not know, time to get cracking and find out!
The big provision to look for in your lease is what we commonly refer to as a “force majeure” clause (also called an “Act of G-d” clause). This clause typically allows for the delay or suspension of performance obligations by the landlord and/or the tenant due to unforeseeable events identified in the lease. Generally, events are usually limited to the truly unforeseeable and catastrophic events such as war, fire, earthquake, terrorist act, pandemic and the like. However, no two force majeure clauses are the same (attorneys all draft leases differently). Be sure to look at your own lease and do not rely on the word of your colleagues so you can see what potential relief, if any, a force majeure provision may provide to you and your business.
Keep in mind that it is not common for force majeure provisions to provide for a delay or suspension of rent payments unless the leased premises is actually damaged or destroyed by the force majeure event. That means an advantage to the landlord; but is it? If a commercial tenant is forced to shut down temporarily (or even forever) because of a pandemic, it does a landlord no good having a provision entitling them to rent regardless of circumstances if the tenant does not have the means to pay (or files for bankruptcy protection).
Conceivably, commercial tenants could attempt to argue that their leased premises have been “constructively” damaged or destroyed and, therefore, they are permitted to delay or suspend rent payment obligations. The proverbial jury is out on that one (although it is an argument that is highly unlikely to carry the day).
Other arguments available to either side may be concepts such as “frustration of purpose” or impracticability. Under a frustration of purpose theory, it would be argued that a government shutdown has effectively excused performance by a party because of an unforeseeable risk not covered by the lease. Under an impracticability theory, a party is relieved of performing one’s obligations when performance can only be done at an unreasonable or excessive cost. Of course, there will always be a difference of opinion as to what constitutes unreasonable or excessive.
Does your lease provide for rent abatement? It may, but most do not have a general rent abatement provision for a tenant’s inability to operate. Typically, abatements in rent are limited to loss of services that prevent a tenant’s operation, provided such loss of services is caused by a landlord’s negligence, willful misconduct, or even mere acts or omissions.
The bottom line is that you cannot have a cogent and intelligent conversation about your lease if you have no idea what it says. Commercial leases can be a long and grueling read. Take your time and make sure you understand what it is you are reading.
You’ve done your homework. You’ve done your review. Now, call your attorney, call your accountant, call your real estate broker (if you used one) and call your insurance broker and ask questions! Discuss your concerns. Discuss finances and possible options to weather this pandemic and keep the doors to your business and building open. Discuss the provisions of your insurance policy and lease to see if those people have any other ideas or solutions.
Once you have spoken with your hired professionals, landlords need to talk to their tenants and tenants need to talk to their landlords; and that means talking (not emailing or texting, but talking). It is astounding how much we have forgotten to talk with one another. We send emails and text messages and because we are in such a hurry, we often misinterpret what the other is trying to say in such a shortened method of communicating. Talking, along with listening, is key. Landlords want to hear tenants are committed to remaining open and tenants want to hear that landlords are committed to having their current tenants remain. Opening the lines of communication can bring forth solutions the other side may not have necessarily been thinking of; and should you come to an agreement, put it in writing.
And after you have weathered this pandemic, contact us at Bramnick Rodriguez so we can discuss with you updating your commercial lease and making amendments to those leases in effect, as well to review your insurance policies to make sure that you have the coverage your business needs in the event of future losses. Whether it’s increases or reductions in obligations in light of COVID-19, lowering performance obligations to remain open reducing services like janitorial, amending termination provisions (some leases allow for lease termination based on a failure to meet certain sales goals or other financial obligations) or insurance obligations and requirements, our attorneys and staff stand ready to assist you in any way we can.
Gavin I. Handwerker, Esq. and Carl Salisbury, Esq. are members of our firm’s commercial litigation and insurance practice group. If you are in need of their assistance, or that of any of our experienced attorneys, always feel free to call our main number at 866-845-5571 or Mr. Jon Bramnick’s cell phone at 908-591-9245 seven (7) days a week.
Bramnick, Rodriguez, Grabas, Arnold & Mangan, LLC