April 24th, in a Freeman Lovell webinar, Josh Freeman and Michael Thomas discussed the impact of COVID-19 on legal relationships. This post is a supplement to that webinar. A recording of the webinar is embedded in the below post, or you can watch it HERE .
Written by Michael Thomas
In Part 1 of this post , we introduced some of the complications that may arise due to COVID-19 in what were previously well-functioning legal relationships. Businesses are reviewing their current and future contractual obligations more closely. And new statutes and regulations are being passed in different states, addressing a business's responsibility and liability when it comes to the novel coronavirus. In the State of Utah, for example, Governor Herbert signed into law the bill we discussed in the webinar providing immunity from civil liability for harm resulting from exposure to COVID-19 on a business owner's premises.
Tenants looking for a way out
The relationship between landlords and tenants has been among the hardest hit. Tenants find themselves struggling to pay rent or, in some instances, not able to make the most out of the space they have rented in the way they would like. Reportedly, some tenants have seized on an opportunity to have an excuse to forego rent payments even if they are in a position to pay! Does a pandemic mean that everyone can just walk away from their leases? Not necessarily.
A good starting point is the applicable contracts. For landlords: do you have a business interruption policy that may apply? And what does the lease provide that may apply to this situation? Has access been guaranteed? Has rent been conditioned on a certain level of access or peaceful enjoyment of the premises?
One relatively common contract provision that may apply is “force majeure,” or Act of God, terms. Such a term provides that performance is excused if an unforeseeable major event makes performance impossible. If a force majeure clause is in a lease, look closely at how it is drafted. In many instances, payment will not be excused; rather, providing the space may be excused. Without an express provision in the contract, common law (court-established) principles of “impossibility” or “frustration of purpose” can apply in similar ways.
Whether you are applying a contract provision or the common law, there is a difference between “impossible” and “burdensome.” A tenant typically takes on the risk that the lease could become less ideal, and that making use of the space could become difficult. So landlords should not bear the brunt alone of a change in circumstances.
student housing and co-working spaces
Student housing and coworking spaces present a unique challenge. Close quarters with other tenants can make compliance with public health directives impractical. However, consider that tenants in these spaces agreed to rent the space knowing that they would be sharing it. That means it is foreseeable that problems with other tenants could arise. If, as a landlord, you can do the things in your power to make the space safer, assuming compliance by all tenants, then coexistence becomes at most burdensome because of the other tenants rather than impossible because of something inherent in the property and the circumstances. The difference between “burdensome” and “impossible” could very well become the test for whether you are still entitled to collect rent.
Of course, maintaining a healthy working relationship with your tenants can be the best way to secure payment without resorting to legal action. Consider whether spreading out tenants, allowing deferrals, or implementing physical barriers can mitigate harms. What kind of safety precautions can you employ to make the space safer? The more we learn about COVID-19, the more ideas will arise for doing just that.
Part 3 of this post will provide an update on developments for employers. For the full webinar, see the link in this post.
