The global business community has come to a standstill leaving a lot of us with a limited vision of how to plan our business operations through this unique crisis. Several real estate attorneys I know have received an overwhelming volume of questions from commercial tenants as to their rights during this period.
I wanted to lay out some points I received from some of the brightest real estate attorneys I have had the pleasure to work with.
My motivation is to hopefully bring some clarity and sense of organization, not only to my tenants/clients but to the business community at large. I want to note this is specific to New York City and the laws which govern this State.
If you are debating if you should just walk away from your lease because of the uncertainty of your company’s future, please consider your landlord has made certain to protect themselves by not just taking back the space but being able to go after your company’s assets and if you are a guarantor of your company’s lease, your assets as well. If this scenario is not the optimal outcome you are seeking, I would suggest using the likelihood of not being able to pay the rent as a way to enter into a renegotiation of your lease terms, even if it may be for just a temporary period of time.
The following are some general legal principles you will find in your lease. If you are currently debating to “walk away” from your lease, I hope you find the following insight persuasive enough to sway your decision to work out terms with your current commercial landlord. Outcomes will vary based on your specific situation and I am available to discuss with you in detail to help implement a strategy in this time of uncertainty. You can find my contact info at the end of the article.
Continuing Liability
The business is liable for the rent even if it shuts down on a temporary basis or if matters are worse, permanently. Under the commercial lease, the remedies for the landlord are suing to collect all past due and future rents plus seizing the business’ assets and/or guarantor’s in order to sell them to cover the rent in arrears.
Guarantors
The landlords have protected themselves in the event the business has no assets to pursue. If your lease has a guarantor, then your guarantor will remain fully liable under the lease’s guaranty. Your guarantor should be fully aware of any and all actions the company takes since they are liable for
a portion or all of the costs of defaulting on the lease.
Rent Abatements and Lease Terminations
The terms governing force majeure, casualty and condemnation may entitle the business to terminate the lease or receive a partial or full rent abatement. Leases may not have contemplated pandemics since it is a novel circumstance, it cannot be predicted how the courts would rule based on legal theories on this matter. If your landlord is not open to renegotiating the terms or terminating the lease, litigation may be your only option.
Rent Defaults
In the event a business decides to or has to, stop paying rent, many leases do not provide a cure period however under these circumstances a landlord may likely provide it. In the event, the landlord does not provide a cure period, the business will receive a formal notice terminating the lease including a demand of surrendering the space and paying all damages as outlined in the lease. At this point, your attorney can file for a “Yellowstone injunction”, which may allow for the business to cure the default with the landlord.
Business Interruption Insurance
My network of insurance experts is advising that it is unlikely that business interruption insurance will provide any relief. Most policies disclaim liability for loss of business due to public health circumstances, additionally, a majority of policies require that the cause of loss of income is due to physical loss or damage.
Currently, the State of New Jersey is considering passing legislation that would cover loss of income resulting from Covid-19 as covered, notwithstanding the terms of the insurance policy. If the law passes and it works to stimulate business, other States may follow suit.
Governmental Relief
Businesses can take advantage of several Federal, State and local relief programs that are available to small and mid-sized businesses, ranging from low- to no-interest loans and outright grants, and significantly more will be available over the coming weeks.
Bankruptcy
The very last resort, businesses, and their owners might consider filing for bankruptcy. I strongly suggest speaking to an experienced bankruptcy attorney since this route can have serious long-term repercussions.
I hope the above guide of general lease terms and their impact on your tenancy is helpful. It would be my privilege to be of service to any commercial tenants looking for guidance during this time.
Please contact me at 201-247-2297 or you can send me an email to abose@keystone-commercial.com
