To say that most businesses were unprepared for the COVID-19 (coronavirus) pandemic would be an understatement. Although several countries have lived and learned from the SARS and swine flu epidemics, no one was really prepared for what 2020 had in store. American citizens had not experienced anything like it since the 1918 Spanish flu pandemic.
From a legal standpoint, the business world has learned a lot in a short period of time. The many obstacles that business owners have faced since the start of the pandemic – and the lessons they have learned – could help all businesses be more resilient in the future. At the same time, many mistakes have been made and we must learn from them.
In this article, let’s take a look at the impact of COVID-19 on commercial leases and business interruption practices in particular.
Commercial lease contracts
During the COVID-19 pandemic, many businesses were unable to pay their rent due to an unexpected drop in income. As a result, many struggling commercial tenants have written to their landlords asking for a temporary suspension of rent payments. Finally, the CDC announced a moratorium on residential evictions which has been extended until March 31, 2021.
Unfortunately, commercial tenants have not been so fortunate. Commercial leases generally do not contain force majeure provisions, nor do they cover disasters such as a pandemic.
What is a force majeure clause?
“Force majeure” refers to a provision included in contracts which essentially removes liability for the occurrence of an event beyond the reasonable control of a party to the contract (eg natural and unavoidable disasters), and which prevents said party from performing its obligations under the contract.
In other words, the ability of a party to seek redress due to force majeure depends entirely on the express terms of its contract. As such, force majeure events must be specifically factored into the contract, which, again, is not usually the case with commercial leases.
Keep in mind that just having a force majeure clause in a contract may not be enough to excuse a contractual obligation. But as a preventive measure, it’s a good place to start.
Let’s bring it back to commercial leases. Unless a temporary halt in rent payments is included in the contract, it is entirely at the discretion of the landlord. Demonstrating a full and on-time payment history and making a respectful and compelling request can be very helpful (or not).
What are the doctrines of impossibility of execution and frustration of finality?
Since the start of the pandemic, many lawyers have argued that New York City laws excuse paying rent under COVID-19 conditions. Under the doctrine of impossibility of execution, a government-mandated foreclosure, they say, prevents many commercial tenants from paying rent.
The doctrine of goal frustration also provided a legal basis to advocate for a suspension of rent payments. Due to unforeseen circumstances caused by the pandemic, most business owners are unable to:
Open their premises and do business.
Hire employees to work on their premises.
Allow customers to enter their premises.
Therefore, there can be frustration with the purpose of the commercial lease agreement, and a commercial tenant’s rent payments can potentially be excused.
Whether it is legally viable to stop rent payments under the inability to fulfill or goal frustration doctrines will continue to be heavily debated in landlord-tenant commercial disputes as long as COVID-19 will persist.
Bottom Line: In the future, businesses may negotiate with their landlords to include force majeure provisions or unpredictable emergency language that allows them to temporarily suspend rent payments if such situations arise. We are seeing landlords adding arbitration provisions, which may not be the best idea for tenants or landlords.
As soon as the government-imposed closures took effect, the cash flow dried up. Many business owners have started to question the viability of their businesses, reviewing virtually all of their existing contracts and memberships in an effort to save money during these tough times.
Many B2B companies compromised and offered discounts to struggling customers because they couldn’t afford to lose their business.
Keep the outline of the contract
Business contracts can be long and overwhelming, but they are the legal roadmap for structuring your relationship with the other party to the agreement. To help organize all of the information in a contract, we recommend that you keep a brief bulleted outline for each.
Each plan should include important information, such as:
Of course, not all contracts are created equal, so your plan should be tailored to the particular transaction in question.
If your business operates a number of contracts, we recommend that you have physical and electronic copies of each contract. You should always have a copy of the fully signed contract handy.
Keep physical copies in a safe place where you can quickly refer to each contract (accordion records are great for storage and organization). Electronic copies of fully signed contracts should be saved in password protected files.
Know your doctrines
What if the COVID-19 pandemic puts you on the verge of breaching your contract, there is no force majeure provision applicable, and the other party to the contract is not not willing to renegotiate?
Perhaps it is time to see if the doctrines of the impossibility, impracticality or frustration of purpose can apply.
As mentioned above, the doctrine of impossibility of performance implies a situation where circumstances arise which make performance impossible. This doctrine is used as a defense against the performance of a contractual obligation (such as the payment of rent).
In special circumstances, this defense would be granted and performance of a contract would be excused. For example, you would never expect a painter to finish painting a house that has just burned down.
The doctrine of impractical performance exists when there are “extreme, unreasonable and unforeseeable hardship by reason of some event or unavoidable event”. It’s more than just a change in the degree of difficulty or expense. These are contractual obligations that become excessively onerous, difficult to perform or harmful.
Another contractual doctrine that could be applied to you is the doctrine of frustration of purpose, which we discussed earlier. The frustration of the goal requires the following:
An event occurred which frustrated the mutual basic objective of the contract
The event was unforeseen (not within the scope of the risks assumed under the contract)
The event was caused neither by nor under the control or avoidance of the party
The event renders the value of the performance essentially worthless
Although the parameters are specific, this doctrine may be more suitable for your business than inability to perform or force majeure when performance or payment is not “impossible”, but the circumstances still justify a waiver. execution.
Bottom Line: Each contract requires its own careful and individual analysis.
Business interruption insurance
Many businesses have been forced to close (permanently or temporarily) due to the COVID-19 pandemic and subsequent government shutdown orders. As a result, many of these companies have filed a claim with their insurer for business interruption coverage.
Business interruption insurance provides a business with the income it would have earned had the disaster not occurred. Coverage is typically provided as part of a property insurance policy or as part of a comprehensive policy. Business interruption coverage compensates the business for lost income if a business were to leave property due to disaster-related damage covered by the property insurance policy.
Typically, direct physical loss or damage (such as a natural disaster) would trigger business interruption coverage. Business interruption coverage can also be triggered due to the actions of civil authorities. Most business interruption insurance policies for actions of civil authorities contain the same standard language.
What is a civil authority provision?
Provisions relating to civil authority aim to apply the business interruption guarantee when there is damage to the property of another company which leads the civil authorities to prohibit access to the area where the property of the insured is located.
For example, suppose an earthquake hits Times Square (an unlikely scenario) and authorities such as the Mayor of New York City or the Governor of New York State order Time Square to shut down. This area could include businesses that would be affected by such a civil authority order, even if those businesses suffered little or no damage.
However, most civil authority provisions also require that the civil authority order be in response to direct physical damage resulting from a cause covered by the insurance policy. As a result, insurance policy providers are likely to deny most business interruption claims related to COVID-19.
An overwhelming majority of these refusals are due to the absence of physical damage due to a covered cause.
Insured businesses could try to obtain business interruption coverage by claiming that COVID-19 itself caused physical damage by contaminating a property. Unfortunately, most insurance companies explicitly exempt coverage for damage from viruses and bacteria and disagree that COVID-19 causes actual physical damage.
However, filing a commercial claim could be advantageous. If there is ever a change in the laws dating back to the date of your claim, you may be covered retroactively.
Regardless, businesses continue to file business interruption claims. After all, if you don’t file a claim within the allotted time, you may lose your claim forever. Refusal of a claim reserves the right to appeal in the near future.
Bottom Line: Many insurance companies are sued by business owners for refusing business interruption insurance coverage. If the courts rule favorably regarding COVID-19 and physical loss or damage, businesses may be able to obtain insurance coverage after an appeal.
Â© Copyright 2017 – 2021 Sinayskaya Yuniver PCRevue nationale de droit, volume XI, number 172