The Covid-19 pandemic has taken center stage for the greater part of 2020. It has had an impact on every aspect of our lives. The legal industry has been forced to adapt. As the pandemic closed in on New York state in early March 2020, life changing Exec-utive Orders and newly written laws were at the forefront. Now is the time to change and rebuild.
In addition to the many Executive Orders that have come down since March 2020, New York City Mayor Bill de Blasio signed into law NYC Council Int. No. 1932-A (2020) on May 26, 2020. This new legislation amends the NYC Administrative Code by prohibiting landlords from enforcing personal guaranties on certain commercial leases for defaults oc- curring between March 7, 2020 and Sept. 30, 2020. However, a court may rule the law un- constitutional and as a result, the same guarantors may find themselves on the hook for arrears that they no longer have the money to afford. Now is an excellent time for tenants to negotiate with their landlords, given the bargaining strength that this law provides.
On May 7, Executive Order No 202.28 enhanced protections for residential tenants by allowing the security deposit to be used to pay rent in arrears from March 20 to Aug. 20 and to prohibit late payment charges or fees during that same period. Parties to commercial leases can use similar relief. As a result of these orders and potential for future orders, practitioners should take a closer look at lease clauses affected by the Covid-19 pandemic particularly as facts relate to a default or breach under a given lease.
Many leased spaces have become empty due to the mandatory closings of businesses and or mandatory quarantine. Tenants have found themselves in extraordinary circumstances, having an inability to earn income and accordingly pay rent. Land- lords have also experienced unusually low demand for even the once top-rated rental locations. The interests of landlords and tenants are at odds more than ever. Property owners want to protect their rental income while tenants are trying to minimize liability. Within this battle, there is no recourse in place for landlords against tenants who do not have ability to pay rent. As a result, landlords and tenants might write future clauses to include a compromise. They may consider using the security deposits in the place of rent under these unforeseen circumstances and they will likely require additional months security, if possible, in light of strict rentals laws enacted in 2019 (See Housing Stability and Tenant Protection Act). Other clauses of interest are as follows:
Force majeure The force majeure clause or similar act of God clause provides parties to a contract with a defense that may allow one to avoid contractual obligations for a period under certain circumstances. Force majeure clauses extend the time for performance, but in many instances do not eliminate the responsibility to perform unless performance is moot. Many force majeure clauses say the following or a similar variation of a list of events that would prevent individuals from performing under the contract such as act of God, war, terrorism, earthquakes, fire and usually a catch all statement that states “such other acts or events that are beyond the per- sons control.” The question is, does this global pandemic automatically fall into these cat- egories? How should this clause be written with the foreseeability of another pandemic?
Continuous use Many commercial leases require tenants to agree to continued use so that they do not end up with vacant units, especially in shop- ping malls. There is usually not a carve-out for force majeure. Covid-19 restrictions have in some cases made continued use impossible. However, this will remain important to landlords and should be addressed in future leases.
Rent clauses Most leases require the payment of rent as an independent covenant. Meaning the tenant must pay rent without regard to access to services, amenities or closing of the premises. Force majeure usually doesn’t apply to rent or other additional rents. Parties may consider applying rent abatements to loss of use of services essential to tenant’s business, such as elevator access. Options for parties are to draft the option for rent deferment and repayment to be on the backend or spread across the remaining terms of the lease. This can be done with part of the rent to account for reduced income of the tenant and al- low the landlord to maintain some income.
Health and safety Another major concern surrounding the Coronavirus Pandemic and lease provisions are of course, health protocol provisions. In drafting lease provisions both tenants and landlords hope to get the most from the transaction while maintaining efficiency in health and safety. Now more than ever, provisions need to be narrowly construed and well written in order to protect both tenants and landlords from unwanted health issues. Provisions such as building inspections and building maintenance take more priority because consumers want to make sure they are not at risk of contracting the virus, or sellers at risk of inadvertently spreading the virus. Before Covid-19, real estate transactions could had been completed in a week. These days, with more awareness and liability concerns, parties are stringent about what is allowed in a lease. Both tenants and landlords would want to assure a safe environment, free from concern, so that a deal can be made.
Generally, provisions concerning glob- al pandemics are not contemplated into lease drafting. When drafting commercial unit leases tenants now should consider pandemics and require landlords to address mandatory routine cleaning and adherence with mandatory quarantines and compliance with all new CDC regulations. For residential units, mandatory full and thorough cleaning of the unit, also in compliance with procedure and tools approved by the CDC, is a must. These are some factors that might want to be considered in drafting leases amidst the pandemic.
Note: Sabine K. Franco is the principal attorney at Franco Law Firm, P.C., locat- ed in Garden City New York. Ms. Franco fo- cuses her practice on real estate and busi- ness transactions.