When the COVID-19 pandemic hit U.S. cities in mid-March and the vast majority of businesses were compelled to close or severely limit operations, it caused a wave of uncertainly to ripple through the leasing and property management world.
Endless questions immediately arose, both for landlords and tenants. Does the lease contemplate this type of situation? Is this a force majeure event? Will insurance cover our losses? Will tenants be able to pay rent? Are tenants even obligated to pay rent?
Around the same time that businesses were shuttered, and many tenants stopped paying rent, eviction bans were enacted and eviction courts throughout the country also closed their doors to the public. This left landlords and tenants to either work out a resolution themselves, commence costly litigation in federal court or state courts of general jurisdiction, or wait until eviction courts eventually reopen and bans on evictions are lifted.
As businesses and courts across the nation begin to reopen—and with many of those questions that arose in March when the pandemic first started remaining unanswered—landlords and tenants need to prepare themselves for the road ahead. Here’s what we know so far about what that road will look like.
Eviction courts will be slow
The eviction process (known in many states as “summary proceedings”) is typically a speedy process when compared to the sluggish pace of normal litigation. However, the COVID-19 pandemic has brought the eviction process in many states to a screeching halt, either through federal, state or local orders expressly banning evictions, or simply due to the fact that eviction courts were closed during the state of emergency.
With orders now being lifted and courts slowly reopening, evictions will resume but the process will not be as quick as landlords are accustomed to. The closure of eviction courts, combined with an unprecedented number of lease defaults, will create an enormous backlog of eviction cases, delaying the adjudication of eviction cases potentially for several months from the date of filing. While many courts have and will continue to adopt virtual hearing practices, in-person hearings will be limited for the foreseeable future in order to adhere to social distancing guidelines, and cases will likely continue to be delayed for months to come.
Expected arguments from landlords and tenants
Both landlords and tenants will undoubtedly look first to identify any force majeure language in the lease which may excuse (or expressly require) performance of certain obligations following events such as labor strikes, natural disasters, epidemics, pandemics or other causes beyond the control of the parties. The language used in force majeure clauses varies widely from lease to lease. However, because a major pandemic has not occurred since 1918, it is uncommon to find the term “pandemic” in typical force majeure provisions. Moreover, the typical force majeure provision in a lease will state that force majeure events do not excuse the tenant from paying rent.
While landlords throughout the country will be asking courts to enforce the leases as they are written, just as landlords are being required to pay their lenders and comply with the terms of their loan documents, tenants will likely raise equitable arguments to excuse nonpayment such as impossibility, impracticability, frustration of purpose or claiming the pandemic to be an act of God. However, in the absence of force majeure language clearly excusing the payment of rent, courts are often reluctant to deviate from the text of the lease and excuse the nonpayment of rent.
This point was illustrated in Bayou Place Ltd. Pship. v. Alleppo’s Grill, Inc., 2020 U.S. Dist. LEXIS 43960, a recent case decided under Texas law where a restaurant tenant stopped paying rent after it was forced to close, and then continued suffering business losses, due to flooding caused by Hurricane Harvey. The lease at issue did not contain any force majeure language so, when the landlord sued for breach of contract, the tenant raised two arguments to avoid its obligation to pay rent: (1) Hurricane Harvey was an unavoidable act of God that excused tenant’s obligation to pay of rent; and (2) the purpose of the parties’ contract had been frustrated by the hurricane and resulting damage.
Even though the court agreed that the hurricane was an act of God, the court rejected both of the tenant’s arguments, holding the tenant liable for all unpaid rent. This result was somewhat predictable as Texas does not recognize an act of God as an excuse for contractual nonperformance unless such relief is contemplated in the contract.
However, amidst the current pandemic and related government orders forcing businesses to close, Texas courts will likely see tenants raising equitable defenses, including the impossibility of performance, which is recognized in Texas under the following circumstances: (i) destruction or deterioration of a thing necessary for performance; (ii) the death or incapacity of a person necessary for performance; or (iii) a change in law that makes performance illegal. Commercial tenants in Texas and throughout the country will likely argue that “stay at home orders” made performance of the contract impossible or entirely frustrated the parties’ intent and purpose in entering into the contract, and thus the tenant is excused from performing under the lease.
Given the unprecedented nature of the ongoing pandemic and its impact on businesses everywhere, it is still unclear how courts throughout the nation will apply the equitable defenses mentioned above. One thing we should expect is that there will likely be patchwork of inconsistent decisions until at least a year from now when appellate court decisions begin providing guidance. This makes a party’s decision to litigate over a tenant’s nonpayment of rent more difficult than usual and may be a good reason for both landlords and tenants to try negotiating a resolution before bringing the dispute to court.
Negotiating practical solutions
Although eviction courts are reopening, and litigation in state courts of general jurisdiction and federal courts is continuing to move forward (albeit after significant pandemic-related delays), parties should consider negotiating practical solutions to resolve the immediate burdens placed on the parties by the pandemic (i.e., tenants’ need for monetary relief, and landlords’ need to avoid tenant defaults and tenant vacancies).
For disputes involving only the nonpayment of rent, it is reasonable to assume that state and federal judges may attempt to avoid ruling on these issues of first impression and push the parties into early dispute-resolution processes like nonbinding mediations and facilitations. Given the likelihood of being compelled by the court to participate in mediation, coupled with the lost time and significant expense of litigating—issues which will only be only exacerbated in the post-pandemic era of socially distanced litigation—landlords and tenants are incentivized to resolve their disputes outside of court.
While evictions and lease litigation will be unavoidable for some disputes, the added time and expense of litigation in the post-pandemic world, together with the uncertainty of how courts will treat a tenant’s failure to pay rent when the tenant was forced by the government to cease operations, make litigation an even riskier option than it would normally be. So, landlords and tenants should work to find a practical resolution that resolves their current dispute and minimizes the chance of future litigation. To do this, both parties will need to be realistic about the post-pandemic use of the property and each party will likely need to “give a little”—e.g., rent deferral or abatement in return for extending the term or waiving an option to extend.
About the authors
Brian R. Forbes is a member in Dykema’s Dallas office. He focuses on finance and real estate law and he has experience in real estate transactions, including real estate loans, acquisition and disposition of distressed debt, leasing, workouts, modifications, collections, perfection issues, temporary restraining orders, receiverships, foreclosures, sales and purchases of all types of real estate and general financial services.
Michael R. Vogt is a member of the real estate group in Dykema’s Bloomfield Hills, Michigan office. His practice involves all aspects of real estate litigation, including land use and zoning, eminent domain, landlord/tenant, commercial foreclosures and a variety of business disputes related to the purchase, sale, leasing and management of commercial real estate.
Steven Mroczkowski concentrates his practice on construction law, complex commercial and business litigation and financial services litigation and is a member of Dykema’s financial services litigation group in Chicago. He represents owners, contractors, developers, small and large businesses and creditors and financial institutions in all manner of disputes.
