Elisabeth Haub School of Law
Land Use Law Center
Supervisor: John R. Nolon, Distinguished Professor
Blog No. 7 of the Land Use, Human Health, and Equity Project
Editors: Jessica Roberts, Jillian Aicher, Colt Watkiss
Contributing Researcher: Emily Lively[*]
This blog reflects the work of the student author on a project for a municipal client of the Land Use Law Center
The COVID-19 pandemic has devastated many small businesses. Since the start of the pandemic in March 2020, New York alone has seen over 2,800 small businesses close their doors for good. Communities of color, in particular, are suffering, with an estimated forty-percent of African-American-owned small businesses not expected to survive the pandemic.
Small business tenants are not the only ones suffering. Landlords simultaneously find themselves with dwindling cash flow. Without consistent monthly rental income, landlords struggle to satisfy their mortgage obligations and operating expenses.
With the pandemic wreaking havoc on both sides, participation in mediation rather than pursuing an eviction proceeding can prove advantageous to landlords and tenants in resolving lease disputes. Mediation allows both parties to work with an impartial third-party to reach a solution that proves mutually beneficial to both parties involved.
Mediation permits landlords to provide existing tenants with some relief while still ensuring the property remains leased with sufficient rental income to meet their debt obligations. Evicting tenants leaves landlords with vacant space and no revenue stream. Additionally, with court closures and eviction moratoriums creating a backlog of cases, pursuing eviction proceedings will not bring about quick or easy relief for landlords.
Because working with tenants is in a landlord’s best interest, there is a strong possibility that tenants can negotiate temporary rent relief or more tenant-friendly provisions and potentially avoid eviction as pandemic-related financial harms persist.
Rent abatement or deferment are options for lease reformation that would allow tenants to temporarily reduce or suspend their monthly rental payments for a set period. Rent abatement provides no obligation to pay suspended rent after the abatement period. Tenants can repay deferred rent in various ways, such as by amortizing the repayment over the remaining lease term.
Early termination clauses allow for the termination of a lease before the end of the lease period. Negotiating for early termination would provide tenants an option for opting out of their lease without having to pay the remaining rent obligation in the event something like COVID-19 or a prolonged shutdown of nonessential businesses occurs again.
A force majeure clause is a provision built into a lease that excuses one or both parties’ nonperformance due to an extreme event or change in circumstances beyond the parties’ control. Very few force majeure clauses guard against epidemics or pandemics. Given the impact of COVID-19, negotiating for a force majeure clause that includes pandemics, epidemics, and/or government-mandated closures is advisable.
While mediation is in the best long-term interest of small business landlords and tenants alike, should mediation fail, a small business tenant could find themselves in court facing an eviction. Courts consider parties to commercial leases to have equal bargaining power. They view commercial tenants as sophisticated business people with greater access to legal representation than residential tenants. As such, courts routinely consider commercial leases to be like any other contract, with contract law primarily governing any disputes. Commercial tenants, therefore, typically must rely on contractual defenses to excuse nonperformance under their commercial lease.
A force majeure defense only applies to tenants with leases that already include a force majeure clause. Courts typically interpret force majeure clauses narrowly, only excusing nonperformance if the clause specifically enumerates the event or change in circumstance.
An impossibility defense excuses nonperformance when an extreme, unforeseeable event renders performance under a lease impossible. Courts also interpret impossibility narrowly, only accepting it as an excuse to perform when an event was completely unforeseeable when the lease was formed. If the event could have been guarded against in the lease, the impossibility defense does not apply.
Under a frustration of purpose defense, while performance under a lease is possible, an unforeseeable event renders the lease valueless to the tenant. Similar to the previously mentioned defenses, courts interpret frustration of purposes narrowly. A showing that performance would be more expensive or burdensome on the tenant, resulting in less profitability or even a loss, is insufficient.
The COVID-19 pandemic has shed new light on commercial lease formation and enforcement. Current lease agreements offer little to no protection for either party against extreme health events and governmental shutdown of nonessential businesses. If small businesses and landlords are to survive this global pandemic, they must work together to find a mutually beneficial solution. Eviction is not an option. Proceeding to eviction will force tenants to close their doors and leave many landlords with empty storefronts. If that scenario comes to fruition, neither party wins, and commercial neighborhoods lose their vitality.
[*] Emily Lively is a second year student at the Elisabeth Haub School of Law and Land Use Law Center Volunteer.
Jessica Roberts is a second year student at the Elisabeth Haub School of Law and Research Assistant to Professor Nolon.
Jillian Aicher is a second year student at the Elisabeth Haub School of Law and Research Assistant to Professor Nolon.
Colt Watkiss is a first year student at the Elisabeth Haub School of Law and Land Use Law Center Volunteer.
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