“Falling Behind on Commercial Lease Payments: COVID-19 Strategies for Landlords and Tenants”

October 17, 2020 COVID-19

If you own or lease commercial property in the Chicago area, you undoubtedly have felt like you were riding a roller coaster these last few months during the COVID-19 pandemic. Commercial tenants are experiencing unprecedented losses, furloughing and/or laying off workers as they watch their sales plunge and their customer and client bases dry up. Many business owners can’t make their commercial lease payments, and commercial building owners find themselves seeking out ways to manage their mortgage and other investment-related payments.

We have been working closely with commercial landlords and our business tenant clients to help them find ways to manage their business interests during the COVID-19 pandemic.

Tenant Considerations: Force majeure, Impossibility Defense, and Frustration of Purpose.

If you are a business property lessee having trouble meeting your commercial lease payment obligations, you will want to look at the terms of your lease to determine what options might be available.

Force Majeure

Many commercial leases contain what is called a force majeure clause, which allocates the risk of loss in the unlikely event that something occurs that is wholly out of the control of either party — say, for instance, a worldwide pandemic.

Force majeure clauses in commercial lease contracts often using boilerplate language that sets out the types of unforeseen occurrences that are covered — acts of God, wars, terrorist activities, etc. — but rarely is the list provided considered all-inclusive. Whether a particular occurrence falls under a lease’s force majeure provision is a question for a court to decide, or can be an excellent starting point for renegotiating the terms of a commercial lease.

Impossibility Defense

While not expressly stated in the contract, the defense of impossibility or impracticability may be an option when confronting a breach of contract action by a landlord. The idea of this defense is that the parties cannot reasonably expect performance of the terms of the contract if performance is not commercially possible. If the government requires you to close down your business to avoid the spread of a novel coronavirus, you can certainly argue that adhering to the terms of the commercial lease is no longer possible, practically or commercially.

Frustration of Purpose

Under the doctrine of frustration of purpose, a party can claim that, through no fault of their own, the principal purpose of the contract has been frustrated to such an extent that the contract terms no longer apply.

Property Owner Considerations: Practical and Legal

Property owners are finding themselves in an extremely difficult position when it comes to deciding how to manage a shortfall in lease payments due to COVID-19 closures and business failures. While many landlords would like nothing more than to help out their tenants during these hard times, not everyone can simply forego lease payment collections without suffering great harm. Property owners have mortgage payments to make and other obligations to meet in maintaining and operating their real estate investments.

Resorting to court actions to evict tenants is nobody’s first choice, and that is certainly true today. Courts are backed up during the COVID crisis, and presiding judges may not look favorably on clogging the courts with eviction proceedings when there could be alternatives that help out all parties concerned.

Some lenders may be willing to grant property owners relief during these difficult times. Multi-family property owners, for example, who are unable to collect rent from tenants, may seek out mortgage forbearance under a Federal Housing Financial Agency program, as long as they suspend evictions during the pandemic. Commercial lenders for other types of properties may also be willing to discuss similar types of voluntary temporary forbearance options.

Finding ways to negotiate on both ends of the transaction — with tenants as well as mortgage lenders — is going to be the best way to proceed for most commercial property owners and their business tenants.

How Field and Goldberg, LLC Can Help

Whether you are a commercial property owner or a commercial property tenant looking for creative and practical ways to work through the lease payment challenges of the COVID-19 pandemic, our experienced legal team can help. Contact our Chicago real estate attorneys today either online or by calling us at 312-408-7200.

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