The coronavirus (COVID-19) pandemic is causing massive disruption to businesses across the globe, causing many businesses to stop paying rent. These unparalleled default rates are directly impacting millions of commercial landlords that are simultaneously scrambling to assess their contractual rights, obligations, and remedies. This is a very fluid situation, and the following
are some general strategies to help commercial landlords navigate these uncertain times.
Several tenants are stating they will not be paying rent, at least temporarily. Such statements by tenants may constitute anticipatory breaches. “[I]f one party unequivocally indicates he will not perform when the date arrives, an anticipatory breach is committed.” United California Bank v. Prudential Ins. Co. of Am., 140 Ariz. 238, 277, 681 P.2d 390, 429 (Ct. App. 1983). “We
have recognized that an action may be maintained for breach of contract based upon the anticipatory repudiation by one of the parties to the contract.” Diamos v. Hirsch, 91 Ariz. 304, 307, 372 P.2d 76, 78 (1962). Before treating it as an anticipatory breach, Landlords must be certain that such statements are in writing and unequivocal, and to avoid risk, Landlords may want to proceed with the normal default notice procedures, such as the failure to pay rent.
Some tenants are attempting to use force majeure clauses (i.e., “Acts of God”) found in many commercial leases to justify their obligations under the lease – and primarily paying rent and operating their business. Theses clauses are rarely invoked. Their application depends on the specific language of the lease and the surrounding circumstances. However, even if such a clause were applicable, many force majeure clauses still require the payment of rent and would only relieve tenants from business operating clauses or similar provisions. Each clause is unique and requires a case-by-case analysis.
Some tenants are seeking to avoid their performance based on the common law doctrine of frustration
of purpose. According to one Arizona court, “[t]he doctrine of impossibility does not operate unless the contractual duties would be impossible for Anyone to perform.” Marshick v. Marshick, 25 Ariz. App. 588, 592, 545 P.2d 436, 440 (1976). Even a financial crisis does not relieve contractual duties. “‘[T]he fact that one is unable to perform a contract because of his inability to obtain money, whether due to his poverty, a financial panic, or failure of a third party on whom he relies for furnishing the money, will not ordinarily excuse nonperformance, in the absence of a contract provision in that regard.’” Marshick v. Marshick, 25 Ariz. App. 588, 592, 545 P.2d 436, 440 (1976), quoting 17 Am.Jur.2d Contracts § 415, at 867-68. Although difficult for many businesses, it does not seem performance is “impossible” as stated in the Arizona cases cited above.
Commercial Evictions and Lockouts
In the event of a breach, commercial landlords in Arizona are entitled to perform peaceable lockouts or
judicial evictions. Most landlords choose to perform commercial lockouts because they are faster and less expensive than evictions. When performing a lockout, it is very important to make sure all default notices have been followed precisely and that a lockout is permitted under the lease terms or A.R.S. § 33-361. Additional procedures must be followed after a lockout, including creating an inventory, temporarily storing the property, and following the sale or disposal provisions of A.R.S. § 33-362 and the lease terms.
On April 6, 2020, Governor Ducey placed temporary restrictions on commercial landlords under Executive Order 2020-21. The order stops evictions and lockouts of small businesses tenants (defined as 500 or less employees) until May 31, 2020. The order seeks to limit evictions and lockouts to only those businesses that are experiencing financial hardships caused by the COVID-19 pandemic, but it does not provide any criteria to determine such financial hardship. The executive order does not “reliev[e] any individual or business of the obligation to pay rent.” Thus, commercial tenants that do not pay rent risk being in default and further risk being evicted or locked out after the temporary restrictions end.
Rent Relief and Workouts
While landlords may have stronger legal rights, especially when it comes to receiving rent payments, they should seriously consider negotiating with tenants. Otherwise, they may find themselves with unwanted vacancies, limited options to collect rents, and little or no revenue to pay their own expenses. Meanwhile, tenants need to recognize that landlords are facing unprecedented levels of requests for rent relief (and all at the same time period), and it may not be feasible for landlords to grant rent relief. Both parties may consider such things as:
• Rent Reduction. The parties could discuss reducing the tenant’s rent for a portion or all of the remaining lease term. For retail leases, one could convert base rent to percentage rent.
• Deferred Rent. The parties could agree to defer a portion of the tenant’s rent temporarily, but the tenant would have to repay the deferred rent at a later time, either in a lump sum or by increasing subsequent payments.
• Rent Abatement. If a tenant is already past due on rent payments, a landlord may agree to forgive a certain amount of the past-due rent but only if the tenant remains current thereafter.
• Loan Conversion. Rather than abating past due rent, a landlord may agree to convert the past due rent into a loan payable over time. The tenant would, however, continue to pay the current rent.
Casey Blais is a shareholder at Burch & Cracchiolo. He is an attorney who practices in the areas of commercial litigation, real estate law and landlord/tenant disputes. He regularly represents individuals, lenders, developers, and other private and public entities in bringing and resolving a variety of legal matters. Representative cases include real estate title and litigation matters, foreclosure actions, business and contract disputes, landlord tenant actions, real estate non-disclosure disputes, and judgment collection cases.