Real Estate Law

COVID-19: A practical check list for landlords and tenants

Apr 1st, 2020

By Laurent Debrun

The lease is the starting point:

Does the lease contain a force majeure clause by which the parties have allocated the risks? A force majeure clause may have the effect of discharging a contracting party with respect to a supervening event which actually prevents that party from executing its obligations. Whoever invokes force majeure has the burden of proving that it prevented it from executing its obligations under the lease.

If the lease contains a force majeure clause, how is the clause drafted? Is its ambit and scope wide, so as to cover any act of God or cases of force majeure or similar catch-all language encompassing an event over which the parties have no control, including a pandemic or government shutdown, or is it specific to certain events only (strike, fire, flood)?

Is the landlord or the tenant excused of all obligations under the force majeure clause as a result of the current situation or only some of them? Most commercial leases exclude the payments to be made by the tenant as excused, deferred, suspended or annulled despite an event of force majeure. This is seen as an allocation of risks by the parties and is valid, save in certain situations (i.e. the lease is a contract of adhesion).

Does the force majeure clause entitle the tenant to terminate the lease? Failing clear language, courts will not favour an interpretation entitling termination due to a 1 or 2 months shutdown. What if the shutdown lasts longer?

Does the force majeure clause permit the tenant to suspend rent payment during the force majeure event or, as is the case with such clauses in most commercial leases, the force majeure clause excludes the tenant’s right to defer the timely execution of its obligation to pay rent on time. In other words, force majeure or not, most leases call on the tenant to continue making payment of rent. Some leases will contain a provision, which may be part of the force majeure clause, entitling the tenant to an abatement of rent but mostly in cases where the building is damaged by fire or major damage.

If the commercial lease does not contain a force majeure clause, then it is in the Civil Code that the rights and obligations of the landlord and tenant are enunciated (art. 1470, 1393 and ff).

There are two schools of thought concerning rent payment during a majeure event. Assuming a proven force majeure event as between the parties and their lease, the tenant may be excused from paying rent while it is prevented from occupying the whole of the premises and receiving the full benefit of the landlord’s obligation to render the premises accessible. If the tenant is only partially prevented from benefiting from the leased premises, then its obligation to pay rent may be only partially extinguished, that is only to the extent of the deficit of use. Another position is that force majeure forcing the landlord to shut down a building or preventing the tenant from operating its store should not excuse the tenant from continuing to pay rent because the landlord is not bound to an obligation of guarantee but only of result. Each case will revolve around its own facts, lease and circumstances.

Absent a force majeure clause, a tenant may not be permitted under the Civil Code to terminate the lease if the leased premises are not available only for 1, 2 or 3 months especially if the tenant is discharged, during that time, from its obligation to pay rent. What if, however, the business interruption lasts longer than 2 or 3 months? When does it entitle termination?

Does the lease contain a clause providing that in the event of a material adverse change or event, the parties agree to renegotiate part of the lease obligations? Landlord should monitor the situation: is the tenant and the public totally prevented from accessing the premises (they are closed and entirely not accessible)? The building or mall may be accessible, but the streets and malls are empty due to the strict instructions regarding confinement.

The tenant intending to denounce a case of force majeure while advising the landlord that it will not pay rent during this event would be well advised to seek professional advice as to the potential effect of such a decision on its rights under the lease. Again, in a most difficult situation such as the current one, constructive communications between landlord and tenant is to be highly recommended as it is guaranteed to yield the best result for both sides, both in the short and long term.

When did an authority (municipal or governmental) issue an order actually preventing the tenant from operating out of the premises or ordering the landlord to close all access to the building? For instance, the first wave of orders in early March 2020 asked restaurants to reduce their clientèle to 50% of their normal authorized capacity, not to close per se. In such a case, is the tenant prevented from peaceful enjoyment of the leased premises as a result of an event of force majeure? He has the benefit of the full premises, unrestricted by the landlord. What if this tenant chose to close instead of operating at a reduced capacity? Is the tenant obliged to continue offering take-out services (which may still be permitted) in order to show that, even in the face of a force majeure, it tried to mitigate its damages.

Is the tenant’s activity an essential service as defined by governmental authorities and it has nonetheless chosen not to stay in operation during the confinement (i.e. a pharmacy, an optometrist, a grocery store etc.)?

Is the tenant making use at a distance of resources located inside the leased premises (hard drives, computer systems, delivery or shipping services etc.)? In other words, is the tenant receiving part of the benefit of the lease despite the closure?

Is the tenant doing what it can to mitigate damages? In each case, the question will be: is force majeure the direct cause of the closure of a merchant or of a tenant’s impossibility to access office space?

Document the timeline of events which led to the closure of the business or offices. When did the tenant actually close operations? When was the building closed? When did the municipality or government order the closure of malls or a professional order ask its members to stop all procedures (i.e. dentists, opticians etc.).

Is the tenant selling online? Did its sales increase as a result of the store closure? Should this be factored in? if a fast food restaurant continues offering take-out service and deliveries, and its sales increase during the confinement period, is force majeure relevant? Should the tenant be entitled to a rent abatement? Is the loss of revenue the sole basis, absent a force majeure clause in the lease, entitling the tenant to seek rent abatement or non-payment of rent or is it that the tenant did not actually obtain full and complete enjoyment of the premises during the crisis?

Despite being closed, is the landlord continuing to render services to the tenant as provided for in the lease (accepting deliveries, cleaning, security, insurance protection etc.).

Does the lease contain a notice provision in case a party intends to invoke the force majeure clause? If so, that party must exercise this obligation and issue the notice in strict compliance with the lease. As bailiffs and registered mail are suspended or only available for rare emergencies, have recourse to any reasonable means to communicate the notice and keep evidence of same.

Did the tenant notify the landlord that it was invoking force majeure so as to suspend or defer the payment of rent, including additional rent, in whole or in part, during the force majeure event? While a tenant can attempt to terminate the lease, it may be advisable, after reviewing the applicable termination provisions, to send to the tenant a notice (complying with the notice provisions in the lease) warning the tenant that it will be in default of the lease once it fails to pay rent and or additional rent.

Was the tenant in default under the lease when the force majeure event arose? Is the landlord considering invoking such a default to terminate the lease?

Should the landlord send a default notice to the tenant contesting its invocation of an event of force majeure?

Is the tenant prevented from paying rent due to cash liquidity issues caused by the pandemic and ensuing closure of all retail activities? Increased cost to do business, Insolvency or lack of funds is not a case of force majeure. When the crisis is over, a tenant may not be able to claim that he cannot pay rent on time going forward because of losses sustained during the closure of all retail activities.

If the lease contains a continuing operations clause, is the tenant truly prevented from operating? For instance, a bank located in a closed mall. If the bank has an ATM with street access, does the closure of the mall allows the tenant to interrupt service via the ATM? Can the landlord ask the bank in this example to suspend service or, on the contrary, to continue ensuring service? To what extent could the bank, in this example, claim that it was prevented from making use of the premises if its clients can do most operations through the ATM or on-line?

Both during the shutdown and when it is officially lifted there will be other considerations. Can tenants gain access to their premises to retrieve files and equipment in the event access to the building is restricted? Can a landlord examine a tenant’s customers, clients, suppliers and employees for signs of illness? Could the latter persons claim that their privacy rights are affected by a landlord’s response to COVID-19 and the control of a building?  Is a landlord permitted to enter a tenant’s premises without permission during the shutdown to disinfect it or does this obligation fall upon the tenant? What obligations does a landlord have to keep a building clean and safe in the midst of a pandemic?

Can the landlord limit services to a building after the pandemic and for what reasons?

Insurance considerations:

Does the landlord’s or tenant’s insurance policy require notice to the insurer that the premises are closed and not occupied for an unspecified period of time?

Does the landlord’s policy cover the tenant’s losses for business interruption caused by an event of force majeure? Does the landlord have coverage for loss of rent during a force majeure event?

If the landlord’s lease provides for the landlord to receive, as additional rent, a percentage of the tenant’s sales above a certain amount, are those losses recoverable under the landlord’s policy?

Should both the landlord and tenant issue a notice of claim to their insurer to reserve and protect their rights? Brokers are recommending that this be done systematically, even if the insured believes that it is not covered. Policies are complex, a pandemic of such magnitude may qualify under some type of coverage  that you are not aware of or misapprehended and, even if its does not cover the loss, a written denial of coverage by the insurer may prove necessary should governments provide some indemnification at a later stage while requesting proof that the person was not otherwise indemnified or had insurance coverage.

Is the landlord maintaining essential security services to the building and to the tenants’ premises during the shutdown?

Did the tenant take all necessary measures to secure the premises during this closure? If an insurance policy or the lease requires regular monitoring of the promises while a store of office is closed, the tenant or landlord should make sure that this is respected.

Pro-active business considerations:

Has the landlord reviewed its mortgage obligations, fixed costs and other expenses during the force majeure event? Has it made a contingency plan in the event this crisis lasts more than 2 or 3 months?

Does the landlord have the ability to withstand on its own one or more months of delayed rent payments or worse, non-payment of rent by some or all of its tenants?

Even if a force majeure protects the landlord, Is the landlord prepared to defer rent payment and to capitalize the deferred rent over the balance of the term of the lease or under some other formula such as a back-end loaded lease or progressively increasing rental payments or an extension of the term of the lease?

Is the landlord willing to settle with the tenant for additional rent, including business taxes, municipal taxes and maintenance costs during the shutdown period and waive entitlement to rent payment? Do the landlord’s mortgage or loan obligations permit it to settle without the lender’s approval?

Is an amendment to the lease required to reflect such an agreement? If so, it would be useful to consider obtaining a complete release of all claims stemming from the force majeure event as consideration for a business solution, including future losses or business interruption.

When normality returns, will the landlord have an obligation to take certain measures to ensure the continued safety and health of the occupants of the building or mall? Will this impact other tenants?

Can the landlord or through him, the tenant, obtain a reduction of business taxes, waste collection, other municipal taxes? Municipalities may have to do their part to be part of the solution.

Under the Civil Code, both the landlord and tenant are expected to act reasonably, in good faith, using contractual means and legal rights with proportionality and without intent to harm. In this time of international pandemic, this duty is even more important.

As soon as the government order imposing the shutdown and confinement measures is lifted in Quebec, tenants should resume occupancy forthwith. The landlord will want to monitor this return to normality.  Some tenants may continue to face a situation amounting to force majeure (i.e. the tenant’s sole or primary source of products sold at retail is in a country which continues to be on lockdown).

No situation is similar to another and each case must be carefully reviewed. If you wish to discuss your rights and obligations as landlord or tenant in the face of the Covid-19 pandemic, please feel free to contact us.