COVID-19 and Commercial Leases: What Texas Tenants And Landlords Should Consider During This Public Health Emergency
With the recent emergence of social distancing guidelines and shelter-in-place orders in areas such as Dallas County, the novel coronavirus, which causes the disease known as COVID-19, has substantially disrupted the day-to-day operations of many businesses across the Texas. Some businesses face the very real prospect of being shuttered by the sheer weight of accumulated financial obligations that cannot readily be satisfied because of the virus and accompanying governmental orders. Many business owners may wonder, among other things, if they have any recourse to avoid – or, at the very least, postpone – their obligations as tenants under their respective commercial leases.
This article provides a high-level summary of potential avenues that commercial tenants may, depending on their circumstances, utilize to secure much needed relief during these difficult times.
Plain Language of Contractual Provisions in Commercial Leases
Commercial tenants should begin, first, by carefully reviewing their lease documents to see if they have included any specific contractual provisions that could help them to accomplish their goals. For example, many commercial leases have what is known as a “force majeure” clause, commonly referred to as an “act of God” clause. Under Texas law, the term “force majeure” describes a particular type of event which may excuse performance under a contract; usually, it is an unexpected event outside of the control of either party. To determine whether a certain event excuses performance, courts typically look to the language that the parties specifically bargained for in the contract to determine the parties’ intent, rather than resorting to any traditional definition of the term. Indeed, contractual terms are controlling regarding force majeure with common law rules merely filling in gaps left by the document. In other words, when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.
Because the application of a force majeure clause turns on the exact language contained in that provision, it is very important for commercial tenants and landlords to carefully review the language to determine if a situation such as the current COVID-19 pandemic would qualify. A concerned tenant or landlord should look for terms such as “pandemic,” “contagion,” “disease,” and “public health emergency.”
Common Law Doctrine of Frustration and Impossibility
Another potential tool that a struggling commercial tenant might employ is the common law doctrine of frustration and/or impossibility. Under these legal doctrines, if the purpose of a lease is totally frustrated by a supervening event of which the lease says nothing, and compliance with the obligations is rendered impossible, the lease may be dissolved and the parties may be excused from their obligations thereunder. The case law on this subject is not extensive in the context of health pandemics such as COVID-19, which are historically rare. Nevertheless, in light of more stringent lockdown measures such as the recent shelter-in-place order by Dallas County, and potentially more to come from other counties, a tenant might be able to use the doctrines of frustration and impossibility to avoid (or postpone) its obligations under the commercial lease.
Seeking Relief Directly from Landlords
If a commercial lease force majeure provision does not account for a pandemic or public health emergency, or if the circumstance of a particular case does not rise to the level of frustration or impossibility, a tenant’s only recourse may be to have a frank and honest conversation with the landlord to obtain short-term relief. These types of interactions are never easy, but they may be necessary for a struggling business. In today’s global environment, many landlords are feeling pressure to work out short-term, temporary deals with their tenants, especially where eviction may be halted or stymied by court closures. Nevertheless, it is important to understand that a landlord may not have the flexibility to forgive or postpone rent if they are subject to are strict loan or insurance requirements.
COVID-19 presents new challenges for many commercial tenants and landlords, and their respective attorneys. It is safe to say that future contracting parties will no longer look at the terms in force majeure provisions the same way. Tenants and landlords should consult with real estate and property law professionals to examine their specific circumstances to determine what they can do to reduce the financial impact of this global pandemic.
Nathanial Martinez is a civil litigation attorney in Dallas, Texas who focuses on commercial real estate, construction, and employment law at his firm Palter Sims Martinez, PLLC. He expressly incorporates herein all disclaimers of all law firm blogs everywhere. These are his opinions, not the opinions of his firm or clients, so do not cite any part of this post against him in an actual case. Every case is different, so do not rely on this post as legal advice for your case.