The current COVID-19 epidemic has had a widespread effect not only on people’s health worldwide, but also on businesses, and in particular, commercial landlords—an often-forgotten sector. With all the media coverage on unemployment and the financial crisis, commercial landlords have been an afterthought as people try to survive. However, special attention should be put on commercial landlords who are taking the brunt of worldwide shutdowns as tenants are unable—or unwilling—to pay their monthly rent in what has become a form of rent strike.
Traditionally, rent strikes have occurred when residential tenants have grievances with their landlord due to health and safety issues such as necessary repairs. A rent strike is an organized refusal by tenants to pay rent, or an effort to seek reductions in rent or concessions from the landlord. The key point about a traditional rent strike is that there is an underlying issue attributed to the landlord. Simply put, the landlord didn’t hold up its part of the bargain, so tenants stop paying rent until the issue is rectified.
With the advent of the COVID-19 epidemic, more and more commercial tenants have decided to withhold rent as of April 2020 as part of their strategic plan to combat revenue losses. In some instances, these commercial tenants are, or were planning to, withhold rent even when their balance sheets were healthy, and their cash flow allowed them to pay the rent. This form of commercial rent strike has nothing to do with landlords failing to uphold their end of the landlord-tenant relationship.
Numerous well-known companies such as the Cheesecake Factory, Adidas and Urban Outfitters have publicly stated their intention to withhold rent either as a preemptive action or out of necessity. Adidas, in particular, was ridiculed for its intention to withhold rent under German anti-eviction laws enacted in response to COVID-19 even though it was able to pay rent. Eventually, Adidas backtracked and stated its intention to pay rent, but the damage was done. When commercial tenants withhold rent, whether out of necessity or exploitive opportunity, it creates numerous legal, political, ethical, and business issues.
Faced with the new world commercial rent strikes, commercial landlords have a number of options to address their tenants’ inability or unwillingness to pay rent. From a legal standpoint, virtually no commercial lease has language that would allow tenants to forgo paying rent during the COVID-19 epidemic. The most obvious commercial lease provision, force majeure, which tenants may seek to implement during this crisis, would likely not face muster in a court of law. A government-led shutdown of businesses is not what force majeure was intended to be used for under commercial leases.
Commercial leases may contain anchor/co-tenancy provisions under which the lease requires a certain percentage of tenants or anchors to remain open, but this creates a gray area. Further, while a rent deferral clause may contain relevant language that a tenant can use as the basis for refusing to pay rent, it’s not a typical provision in commercial leases.
So clearly from a legal standpoint, commercial landlords have the upper hand when it comes to their tenants refusing or unable to pay rent. Tenants continue to be obligated to pay their rent under most commercial leases. However, having the upper hand does not necessarily mean the landlord will prevail. With political, ethical and business factors to weigh, the legal veracity of the situation does not mean landlords will actually end up winners in the end. If you are a commercial landlord or tenant suffering from the effects of COVID-19 and would like more information as to your rights under your particular lease, please contact Richard An of Tayman Lane Chaverri by emailing him at [email protected] or calling him at (202) 695-8269.