Tuesday, May 18, 2021

Land Use, Human Health, and Equity Project, Post 11: The Recovery Lease: Preventing Evictions of Commercial Tenants During the Pandemic

Elisabeth Haub Law School of Law

Pace University

Land Use Law Center

Supervisor: John R. Nolon, Distinguished Professor

Blog No. 11 of the Land Use, Human Health, and Equity Project

 

Editors: Jessica Roberts, Jillian Aicher, Colt Watkiss

Contributing Researcher: Chris Makowski[*]

The Recovery Lease: Preventing Evictions of Commercial Tenants During the Pandemic

By: Chris Makowski

INTRODUCTION

As blog no. 7 in this series emphasized, small business recovery is crucial to urban vitality and urban success. Currently, the COVID-19 pandemic threatens the existence of small businesses and their commercial neighborhoods. Even though time-limited moratoria on commercial evictions are currently in effect in some states, commercial tenants must pay any rent in arrears when the protection lifts. Tenants are further vulnerable to evictions for non-payment of rent because necessary procedural protections often are omitted in commercial leases. Unlike before the pandemic, landlords may struggle to fill vacancies as small businesses struggle to stay afloat. Because of the interconnected problems facing both tenants and landlords, both parties should consider reforming their leases to protect their mutual interests during pandemics and other unforeseen events. Municipalities can help by providing technical assistance and mediation services.

Listed below are some lease provisions that may better serve the interests of both parties during catastrophic events:  

  1. Assignment & Subletting: Many commercial leases limit rights to sublet or assign the tenancy. Provisions can be included in commercial leases to permit these opportunities subject to reasonable limitations. This allows for the addition or substitution of a new tenant who is more financially stable.
  1. Duty to Mitigate: Though rare in commercial tenancies, this provision imposes a duty on the landlord to mitigate damages against an evicted, defaulting tenant. It mandates that the evicting landlord relet the premises at fair market value or at the same rate, terminating the previous lease. Should the landlord succeed, the former tenant is not liable for lingering costs associated with the lease.
  1. Casualty: The casualty clause clarifies, expands, or modifies the tenant’s right to forgo obligations of the lease when the premises become untenable, thereby cushioning tenants from duties inherently limited by uncontrollable events. The landlord and tenant may stipulate what constitutes a “casualty,” or untenable event, and the limitations to performance. The clause should expressly consider pandemics as a triggering event. COVID-19 may render a premise untenable; thus, the clause should relieve the tenant from obligation to pay rent for the untenable duration or allow the security deposit to cover missed rent.
  1. Early Termination: Under this clause, parties may “terminate the lease either at will or on the happening of some contingency.” When based upon a contingency, “[t]he right reserved must be exercised in good faith and upon fair grounds.” When at-will, the clause may confer equal termination power to the parties without requiring good faith. Nevertheless, if unambiguous in the agreement, the right to terminate may denote whatever is mutually beneficial.
  1. Force Majeure: The force majeure clause stipulates the events or occurrences that excuse the tenant’s or landlord’s performance under the lease. However, courts interpret the clause narrowly, limiting its applicability to the specific circumstances stipulated in the provision.  Leases that do not include terms like “pandemic” or “government closure of business due to an outbreak” within their force majeure clauses do not excuse obligations.
  1. No Late Fees: This clause precludes a tenant from incurring late fees when rent is paid later than the date stipulated in the lease. Considering the longevity of the pandemic, and its continued restrictions, a tenant is likely to be late. Adding a “no late fees” provision eliminates the further burden of late fees for failure to make payments on time due to circumstances beyond the tenant’s control.
  1. Mediation: A recovery lease should provide that disputes concerning non-payment may be resolved by mediation. This allows the mediator to work with the parties to form a mutually beneficial agreement, including lease reformation, given the realities of the pandemic.
  1. Notice and Cure: This standard clause can be updated, considering the pandemic, to allow much longer periods for notice of defaults and the tenant’s opportunity to cure the default prior to the termination of the tenancy. Such a provision will give the tenant a reasonable time to assess options and to exercise the option, for example, of  choosing to pursue mediation to resolve the dispute.
  1. Redemption: Applicable in some situations, a redemption clause can permit a tenant to recover economically and reclaim the premises within one year of being evicted. For example, under New York’s governing statute, the tenant must pay the landlord all rent in arrears incurred at default, and the lease must have expired with more than five years remaining in the term.
  1. Rent Deferral: This provision allows a tenant to pay a reduced rent for a stipulated period, deferring the reduced rent for payment later. When “read fully and fairly,” this clause is viewed “as an expression of the parties’ mutual understanding that rent ‘shall be paid’ in the modified manner.” 
  1. Rent Abatement: This provision reduces the rent to be paid during the period of exigency created by an unforeseen event. Common in casualty clauses, the clause should be extended to cover the COVID-19 pandemic; otherwise, a separate clause can abate rent for a period specific to the pandemic.
  1. Renewal/Lease Extension: The parties can negotiate an extension of the lease term to provide a realistic opportunity for payment of deferred or abated rent. “[O]nce the option is exercised, the original lease is deemed a unitary one for the extended term and a new lease is not necessary.” Conversely, the clause can permit modifications to the original lease; these are subject to mortgagee approval.
  1. Quiet Enjoyment: This covenant, often enumerated in leases, can prevent a landlord or its agent from interfering with a tenant’s lawful use of the leasehold through a constructive or unlawful eviction.  The lease may be structured to permit nonpayment evictions only through summary proceedings, after failing to reach an agreement via mediation.

CONCLUSION

To respond to the unanticipated economic impacts of the pandemic, municipalities and attorneys can use this period to rethink and reform lease provisions to prevent evictions and allow tenancies to continue under terms favorable to both landlords and tenants. In the case of small businesses and their landlords, this provides an opportunity to update the standard commercial lease to provide defenses and procedures that the common law and state legislation have not provided.  The pandemic is not over, there is no guarantee that we will reach herd immunity, climate change damage is ever more prevalent, and there is growing evidence of new variants. Reform of the standard small business lease is called for.

  1. Reframing Sustainability: Introducing the Land Use, Human Health, and Equity Project
  2. Planning for Public Health: A New Beginning for Land Use Law
  3. The Role of Density in Combatting Climate Change and COVID-19
  4. Novel Coronavirus Claims Implicate Age-Old Property Rights Questions
  5. State & Local COVID-related Emergency Powers: Individual Rights
  6. COVID-Related Land Use Regulations and Judicial Deference
  7. Mediation of Eviction Disputes May Hold the Key to the Survival of Small Businesses
  8. Using Zoning to Help Eliminate Food Deserts: A Few Steps Forward
  9. Urban Heat Islands and Equity
  10. Urban Heat Island and Equity: What Can Local Governments Do?

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