As the Covid-19 virus continues to spread, commercial property owners are attempting to navigate unprecedented challenges.
Amid the impacts of supply and demand shocks, social distancing, quarantines, and event cancellations, they must remain responsive to the needs of employees, lenders, tenants, and customers, all of whom are feeling the pandemic’s effects.
Below are some considerations that should be top of mind for property owners:
Even if a property is owned by a single-purpose entity, that entity is likely part of a larger company that has employees, including management personnel. During the pandemic, property owners should prioritize the health and safety of employees, contractors, vendors, and anyone else who acts on their behalf.
They are encouraged to follow guidelines from the World Health Organization and Centers for Disease Control and Prevention regarding travel and social distancing during this time.
Public Safety and Common Areas
A property owner should keep common areas and restroom facilities clean and functional at all times, but never has it been more important to ensure that restrooms are stocked with all supplies necessary for frequent hand washing. Increased demand for instant hand sanitizer has drastically limited its supply, but to the extent possible, the property owner should make it available in common areas.
Commercial landlords are often responsible for maintaining common areas, or the residual areas that are not specifically leased out to tenants, including parking lots, landscaped areas, maintenance rooms, restrooms, lobbies, conference rooms, and other spaces that are intended for “common” use. A property owner should review its lease or declarations related to maintaining these areas and ensure the standards are being met.
If it is determined that an individual infected with Covid-19 has been to a property, the property owner should look to the WHO, CDC, and state and local resources to determine the best course of action to respond and sanitize the premises.
Property owners often maintain commercial general liability insurance policies, regardless of whether they pay premiums directly or pass the costs through to tenants. The property owner should review its policy to determine what coverage is available for business interruption due to a potential closure in response to the Covid-19 pandemic.
As property owners face the possibility of being forced to shut down commercial properties in the weeks ahead, it is important for them to understand the extent to which such risk is underwritten and may trigger an insurance claim.
Managing Tenant Relationships
Each commercial property tenant should be subject to a lease agreement with the property owner. Regardless of what may arise as Covid-19 spreads, the property owner should look first to the lease to determine what steps to take with any given tenant.
The following provisions in particular may be important in the weeks ahead:
The force majeure provision, loosely put, typically excuses a party from performing its obligations under a lease if an event occurs that is beyond the parties’ control, such as a labor shortage, strike, terrorist act, natural disaster or other “act of God.”
Force majeure provisions are usually not implied, so a lease that does not expressly contain force majeure language will not benefit from its protections. Some leases may list specific events that would trigger the force majeure provision; others may more generally refer to scenarios that would make lease performance impossible.
If the government takes significant action to prevent the spread of the virus and parties are not able to perform the obligations of their lease, the force majeure provision may provide an excuse for nonperformance.
Retail leases often include “operating covenants,” which obligate tenants to maintain certain business hours or operate their businesses for a specified minimum amount of time. A quarantine or corporate policy that prevents a tenant from operating in the leased premises will likely affect their ability to comply with the operating covenant.
In a retail setting, tenants are often able to negotiate for “co-tenancy” provisions, which provide that “tenant A” will receive reduced rent if “tenant B” ceases to operate on the property. Landlords will likely be subject to the effects of such co-tenancy provisions if co-tenants stop operating due to the spread of Covid-19.
Commercial leases often contain provisions that specifically define what does and does not constitute a default under the lease. Default provisions often have “cure” periods, which give the defaulting party a set period of time to resolve the matter before becoming fully in default under the lease.
Given the constantly evolving situation surrounding Covid-19, a party teetering on the edge of default may seek extended cure periods to remedy nonperformance.
Compliance With Governmental Regulations
A property owner is subject to myriad city, state, and federal laws and regulations that govern the lawful operation of its property. Commercial leases usually contain provisions requiring compliance by both landlords and tenants.
Compliance with any forthcoming emergency declarations by municipal, state or federal government officials would fall under the same umbrella. Property owners are encouraged to monitor the news and guidance from government and public health authorities in the weeks ahead to determine the impact that school closures, business shutdowns, government mandates and health policies may have on operating their properties.
In these uncertain times, property owners should proactively review their property obligations, communicate clearly, and stay informed about the latest developments related to Covid-19.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Patrick Abell is an attorney in Thompson Hine’s Real Estate practice group. His practice includes representing clients in the acquisition and sale of real estate; ground, retail and office leasing; secured financing; and other general real estate matters. He has experience representing real estate developers, shopping center owners, private businesses, publicly traded companies and nonprofit organizations in complex real estate transactions across the country.