Top Issues Facing the Retail Leasing Industry related to the Coronavirus

“You don’t want to be complacent. You always want to be ahead of the curve.” Dr. Anthony Fauci, M.D., Director of National Institute of Allergy and Infectious Diseases

As the coronavirus outbreak continues to develop, now is the time for the Retail Industry to consider response actions to help mitigate their risk and prepare for how they will deal with the fallout from the coronavirus.  The Retail Industry has been hit particularly hard by the coronavirus outbeak, first as a result of social distancing and reduced retail foot traffic and more recently by government mandated mall closings and/or limitations on hours of operation and the size of public gatherings.   

Retail landlords and tenants should carefully review the following sections of their leases in particular to identify the impact of the coronavirus and help mitigate risk: 

• “Force Majeure” Provisions Effect on Rent Payment.¹ Force majeure refers to a legal doctrine under which a party may be relieved from liability for non-performance if circumstances beyond the party’s control prevent the party from fulfilling its obligations under a contract. Force majeure provisions are standard in retail leases but can vary greatly depending on how they were drafted by the parties. While most force majeure provisions are unlikely to list disease, epidemics, or quarantine specifically, many include general provisions covering such things as natural disasters, “acts of God,” acts of government, or “other circumstances beyond the parties’ control.” The coronavirus outbreak presents a somewhat unique situation in that it includes both a naturally occurring component (the virus itself) and a government action component (including the quarantines and other measures put in place in response to the outbreak).  Landlords and tenants should carefully review the force majeure provisions in their leases to determine whether they apply. Many retail leases expressly exempt “payment of rent” from the force majeure clause. That means many tenants may be required to continue to pay rent even if they otherwise would have had a valid force majeure claim.

• Payment of Rent as an Independent Covenant. Many retail leases expressly provide that the tenant’s obligation to pay rent is independent from any of landlord’s covenants or obligations under the lease. That means that even if a landlord is clearly in breach of the lease due to the coronavirus outbreak, the tenant may be required to continue to pay rent. Tenants should carefully review their retail leases to see if they contain this provision.

• Covenant of Quiet Enjoyment. Most retail leases contain an express covenant of quiet enjoyment where the landlord represents and warrants that the tenant will have quiet and peaceful enjoyment of the leased premises for the permitted use. Tenants may be able to claim that the coronavirus impacts violate the covenant, in particular in the case of voluntary landlord mall closings. Depending on how the covenant is drafted, it may be expressly limited by force majeure events.

• Continuous Operation. Retail leases often require tenants to remain open, fully-stocked and staffed and to continuously operate. Mall owners do not like “dark” storefronts. Tenants will need to review their leases for any continuous operation clauses. Force majeure clauses may apply depending on how they are drafted. Retail leases often contain daily monetary penalties for failure to operate so the financial impacts could be significant. Landlords and tenants will also need to determine whether continuous operation clauses are being satisfied if tenant is open only for the hours allowed by government mandate.

• Co-Tenancy; Closure of Common Areas. Many retail leases contain co-tenancy provisions. For example, the landlord may have promised one tenant that a certain anchor tenant will be open and operating in the mall or that a minimum amount of square footage in the mall will be open and operating. Due to the coronavirus mall closings, many landlords are likely in default under such co-tenancy provisions (unless they can claim a force majeure defense). Co-tenancy violations often result in daily monetary penalties and may expressly allow the tenant to terminate its lease after a certain period of time. Landlord’s also often promise tenants that certain common areas or amenities will be open and operating in the mall (e.g. food court). Parties should carefully review their retail leases to analyze the impact of closing such common areas, whether voluntarily or by government mandate.

• Insurance. Landlords and tenants should review insurance policies and lease requirements to determine possible coverage in the event of a business disruption or rental loss, and comply with all applicable notice requirements.

In summary, it is important for the Retail Industry, both landlords and tenants, to carefully review their leases now in order to mitigate their risk of suffering negative impacts from the coronavirus. 

For more information about recommended steps, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization. 

Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries. Click here for Foley’s Coronavirus Resource Center to stay apprised of relevant developments, insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form. 

———————————————————-

¹ https://www.foley.com/en/insights/publications/2020/01/commercial-impact-coronavirus-force-majeure