Tenant Stopped Paying Rent During The Pandemic? Some Do’s And Don'ts For Commercial Landlords
Covid-19 introduced uncertainty to the commercial real estate world, with many building owners feeling powerless over new trends such as the return of tenants to office spaces that were vacated during the pandemic.
But commercial landlords don’t need to feel powerless when tenants argue that government-mandated pandemic restrictions prevent them from paying rent. According to an attorney with Seattle-based law firm Hillis Clark Martin & Peterson, most leases probably give landlords more leverage in these disputes than they might realize. Additionally, there is a century-long precedent in which courts ruled for the landlords in similar cases, a trend that continues today.
“By and large, the majority of courts are siding with commercial landlords in saying that the pandemic is generally not an excuse for the failure to pay rent,” said Amit Ranade, an HCMP attorney and adjunct faculty member of the University of Washington School of Law.
That doesn’t mean a tenant with revenues declining during government-imposed lockdowns won’t argue that the situation makes it difficult to pay certain fixed expenses such as rent. But it might have a difficult time convincing a judge of the merits of that argument.
In this case, the tenant is likely to run up against two counterarguments that the courts historically have found compelling, Ranade said. One acknowledges that while government-mandated lockdowns and other measures may indeed have had an impact on the tenant’s business, those impacts were not a result of anything the landlord did.
“It was not the landlord that prevented the tenant from conducting business,” Ranade said. “They didn't change the locks and deprive the tenant of anything. In this case, it is the tenant that is denying the landlord what the landlord is contractually entitled to, which is rent payment.”
Ranade said that the courts considered this question early in the past century when some local communities were banning the sale of alcohol in the run-up to the National Prohibition Act. In Hayton v. Seattle Brewing & Malting Co., a saloon argued that a local anti-liquor ordinance meant its lease was void because it could no longer operate as a tavern. However, noting that the lease did not prohibit the tenant from operating any other lawful business on the property, the Washington Supreme Court ruled that it had to continue to pay rent under the contract.
Hayton is also an example of a second counterargument that landlords continue to make today.
“Most leases will either identify many different things that the space can be used for, or sometimes they're so broad as to permit any lawful use,” Ranade said. “This allows the landlord to argue that its tenant could have used the space for some nonprohibited purpose, such as a food and beverage service.”
Hayton was among several precedents that Ranade cited when he argued successfully on behalf of a landlord client in the recent Fitness International v. National Retail Properties. The Superior Court for the State of Washington ruled in September that the tenant, better known as LA Fitness, was not excused from paying rent at one of its locations even though it said it was negatively impacted when the government prevented people from using public gyms. Fitness International has appealed the ruling, Ranade said.
“One of our arguments was that the lease didn't prohibit the tenant from using the space in other ways,” he said. “For instance, they could have offered online classes or operated a takeout juice bar. It was the tenant’s choice not to use the space in other authorized ways, which is an argument that other landlords might be able to make.”
As the pandemic enters its second winter, some tenants are likely to continue to argue the impacts prevent them from honoring their leases. Ranade said he expects a modest rise in commercial tenant evictions as government subsidies such as the federal Paycheck Protection Program loans run their course.
But in general, landlords can protect themselves — and, hopefully, avoid going to court with a tenant — if they simply review their leases, particularly the force majeure or “act of God” clause. The clause states whether any expenses or damages incurred are the responsibility of the tenant, the landlord or both.
“Depending on what it says, this could be a good thing or a bad thing for a commercial landlord,” Ranade said. “And of course, if there is no force majeure clause, which was the case in the LA Fitness case, that means everybody is continuing to bear their basic responsibilities under the lease, notwithstanding the act of God.”
His other advice: Keep performing the basic responsibilities of a landlord, no matter how stressed the tenant relationship becomes.
“I’ve been advising landlord clients that, just as they continue to expect rent payment on time, don't change the level of service they're offering to tenants,” he said. “Certainly don't change the locks or anything like that. Hold the tenants to their lease and you yourself should honor the lease as it is written. If you start deviating from ordinary practices as a result of the pandemic, then you are giving the tenant arguments for why the circumstances should result in a change in their rent obligation.”
This article was produced in collaboration between Studio B and Hillis Clark Martin & Peterson. Bisnow news staff was not involved in the production of this content.
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