Top 5 Retail Lease Provisions To Revisit In Light Of Covid-19
The outbreak of the COVID-19 pandemic forced many retailers to close their doors to customers beginning in March 2020, just as the overall economy was pushed into unprecedented disarray. Because of these circumstances and questions surrounding the unusual situation where municipalities were ordering stores to close, Landlords and Tenants looked to the four corners of their leases to determine their rights and obligations. Certain key lease provisions, like force majeure clauses, insurance provisions and operating covenants, warranted careful scrutiny as the parties sought to clarify their contractual responsibilities in light of the impacted retail landscape.
While many of those issues have yet to be resolved and most businesses are not yet operating at full capacity, it is not too early to analyze key lease provisions for the (hopefully not too distant) future, when new deals start getting done in the context of an uncertain and unstable landscape. What follows is a brief discussion of five common lease provisions that may need to be revisited to account for COVID-19 issues, and to put Landlords in a better position to respond and react to the “new normal” that will exist until a vaccine is developed and widely distributed.
The most obvious provision in a lease that will require attention is the so called “force majeure” or “act of God” provision. This provision typically includes a list of specific force majeure events, usually defined as events or occurrences that the parties do not control. If there is a force majeure event, the party who is obligated to perform is excused from such performance. This “tolling” tends to be for the number of days such party is prevented from performing. Prior to COVID-19, it was relatively rare to find a force majeure provision that included pandemics, viral exposures and related outbreaks as events that would result in the obligations of the parties being tolled. However, on a going forward basis, such events should be included in force majeure provisions, and rightly so. A force majeure provision that references “government imposed restrictions” is likely broad enough to include “shelter-in-place” and “safer-in-place” type orders which require businesses to close, but it may be prudent to specifically reference such orders.
Landlords may want to require Tenants to provide notice that they are making a claim under the force majeure provision, and to try to cap the amount of time that such force majeure tolling is effective. If possible, Landlords will want to require that, under all circumstances, Tenants continue to be obligated to pay Rent (including triple net charges), even during a force majeure event like a pandemic. As Landlords are acutely aware, rent payments are a critical component of Tenant’s bargain to lease and occupy space, and many Landlords rely on the Tenant’s covenant to pay rent in order to cover debt payments to lenders and otherwise keep their projects running.
In addition, Landlords will want to make sure that any co-tenancy provisions in their leases contain carve-outs for tenants who are forced to close or operate at a reduced capacity due to such orders. Finally, since both parties may be affected by closures of governmental offices relating to permitting and other administrative issues that may occur during a pandemic, such closures should probably also be included in the definition of force majeure.
USE OF COMMON AREAS
Landlords should make sure that the control of Common Area language found in most leases is broad enough for Landlords to respond and adapt to pandemics and similar emergencies, such as by installing items to improve health and safety conditions and making other (perhaps currently unforeseeable) changes to the Common Area to comply with recommendations or requirements of the CDC, WHO, or state or local authorities. As a result of physical distancing and store-capacity requirements, Tenants may need the right to use portions of the Common Area (like sidewalks) for customers to form lines outside the stores. A Landlord should not decline a request by a Tenant to use the Common Area for queuing. Nevertheless, a Landlord can condition such use upon Tenant fulfilling certain conditions, such as giving Landlord prior written notice of such intent and the expected duration, peak times, and specific area the Tenant wants to use. Additionally, Landlords may want to specifically require that the Tenant cleans up the area used for queuing on a daily basis.
COMMON AREA COST CAPS
In leases where a Landlord provides a Tenant with a cap on increases in Common Area Costs, such cap does not typically apply to “uncontrollable” costs. Following COVID-19, Landlords should consider expanding the list of “uncontrollable” costs. For example, costs associated with a pandemic and the related health or safety measures the Landlord takes (i.e., installation of hand sanitizing stations, upgrades to automatic doors, use of more personnel to administer cleaning and to make sure guests comply with social distancing requirements, etc.) should be deemed “uncontrollable” and not be subject to any cap.
In addition, if it turns out that the “base year” for setting the “floor” for Common Area Costs occurs during a year when the Common Areas are used less because of a pandemic or related outbreak, the Landlord should consider including a “gross up” concept to bring the “floor” up to a number that is more reflective of what Common Area Costs would have been but for the pandemic. Another alternative would be to modify the “cumulative” vs. “non-cumulative” nature of the cap for any period during which Common Area Costs are artificially low.
While some leases provide that any alterations made in the Premises are the Tenant’s responsibility, others split the responsibility between the parties based on the nature of the alteration, whether it is required by law and whether it applies just to the Tenant’s space or to retail spaces in general. In light of the general uncertainty following COVID-19, Landlords should make sure that their leases require Tenants to make (at the Tenants’ expense) any and all alterations required by law, including those borne out of force majeure events. For example, from a Landlord’s perspective, the cost of any barriers within the Premises required to force customers to “social distance” or to further separate customers from employees should be the responsibility of the Tenant. If such barriers are structural in nature, a Landlord will also want approval rights over the location of, and materials used for, such barriers.
RULES AND REGULATIONS
Some leases provide specific lists of Rules and Regulations that a Tenant must follow, while others give Landlords the right to impose reasonable rules at any point during the Term. Either way, a Landlord may want to impose various rules to protect against the potential spread of COVID-19 and to comply with relevant governmental (i.e., CDC or WHO) requirements or recommendations. For example, Landlords may want the right to conduct temperature checks of all people who enter the Shopping Center, including Tenant’s customers, employees and contractors. In addition, it may make sense for Landlords to have the express ability to limit the number of customers present at one time. Building off of these rules, Landlords may also want the specific ability to eject or remove people from the Shopping Center who refuse to comply with the Rules and Regulations or relevant government requirements. For instance, if a customer of a Tenant refuses to wear a mask in the Common Areas of the Shopping Center, the Landlord would have the right to remove that person from the project.
Other lease provisions, like those dealing with insurance requirements, are also important in light of COVID-19 and will be the topic of future Retail Perspectives articles. In the meantime, if you have any questions about implementing the changes referenced above to your lease form, or any other questions relating to retail leasing and operations in the COVID-19 era, please contact us.