With COVID-related litigation ongoing across the country, an in-depth analysis of the language of commercial leases is now more important than ever, as many questions remain unanswered. Much of the first wave of commercial lease litigation revolved around whether commercial tenants were required to pay rent when forced to close due to the pandemic and related government orders. Now, new disputes arise based on the lingering impacts of the pandemic and certain key clauses such as roommates, exclusions from sale, restrictive operating clauses, accident clauses and force majeure provisions are likely to play a crucial role.
For example, commercial leases typically contain colocation clauses that allow tenants to reduce their rent or, in some cases, terminate the lease if key tenants or a number of tenants are not open and operational. These provisions are in the foreground given the government-mandated closures, curfews and social distancing requirements that have forced companies to significantly modify and / or scale back their operations. As with any lease, it is important to read and understand the fine print. Some questions that we have seen arise regarding colocation clauses are:
- When do rent reduction or termination rights mature? Often, colocation arrangements have a deadline and reduced rent and / or termination rights only apply after a certain number of months. But what if a roommate opens and then closes following an increase in COVID-19 cases?
- What does it mean for a roommate to be open for the purpose of meeting the roommate provision? The language may vary from one lease to another. For example, a lease might specify that a roommate must be open and operate a retail business in almost all of their premises to be considered in the roommate test. What does this mean for businesses open for limited hours or engaged only in limited operations such as take-out or curbside collection?
- Is there an operating agreement? Some colocation arrangements require the tenant to be open and operational in order to avail of the colocation arrangement. In some cases, even if there is an operating covenant, tenants may argue that force majeure provisions exempt the tenant from carrying on business. However, the landlord can argue that the operating requirement is a condition and that the colocation provisions simply do not apply if the condition is not met.
- How does force majeure impact the analysis? Some landlords have argued that the force majeure provisions exempt them from “complying” with the roommate provisions. However, traditionally, the law has not treated colocation clauses as “commitments” or “obligations” that create a violation if not respected. In other words, the owner does not “promise” to meet the conditions; instead, these provisions simply establish contingencies and a “tiered rent structure”. See Old Navy, LLC v. Ctr. Dev. Oreg., LLC, CIV No. 3: 11-472-KI, 2012 WL 2192284, at * 11 (D. Or. June 13, 2012). Typically, force majeure provisions are written to excuse obligations to act, not the occurrence or non-occurrence of conditions. See San Mateo County. Coll. Dist. vs. Half Moon Bay Ltd. P’ship, 65 Cal. App. 4th 401 (1998) (force majeure clause which applied to “obligations” did not excuse breach of conditions); Jenkins v. Eckerd Corp., 913 So. 2d 43, 54-55 (Fla. Dist. Ct. App. 2005) (recognizing the disposition of the principal tenant as an express condition and refusing to excuse its failure).
Similar issues apply in disputes over sales exclusion clauses, which may provide for a right of early termination if a commercial tenant’s sales do not meet or exceed a certain threshold. For example: does the non-respect of the operating commitment affect the right of a tenant to exercise the exclusion of sales clause? If this is the case, the Tenants could argue that the absence of operation for any period can be excused by joint tenancy or force majeure provisions. The owners would likely argue that the operating requirement is a condition and that the referral of sales clause does not apply if the condition is not met, regardless of the roommate and force majeure provisions. .
Another important consideration is how sales are calculated. In order to determine what constitutes a sale that matters, when sales should be measured, and how closings affect sales launch thresholds, the first step is to carefully read and understand the language of the lease.
Many of these issues are starting to be addressed now, but have yet to result in published decisions. As COVID-related lease disputes continue to unfold, parties to commercial leases should carefully analyze these provisions and keep an eye out for future legal precedents.