Craig Fugate, JD/MBA
Commercial Leases And COVID-19
Numerous retail and commercial tenants are currently forced to be closed due to executive orders across the country including throughout Indiana. Most tenants incorrectly assume that the standard force majeure contact language excuse them from the payment of rent during the mandated closure of their business. However, very few leases actually contain language addressing the payment of rent during a pandemic. It is true that tenants are excused from many of their responsibilities in their leases at this time, but the payment of rent and insurance requirements are almost always excluded in these clauses.
Once tenants realize that force majeure does not exempt them from their rent payment requirements, they often look to their insurance. Unless the government and insurance companies work together to retroactively include a government shutdown as part of business interruption insurance, the standard business insurance most carry will not be of any help either.
Finally, tenants can look to the common law. Common law provides Indiana tenants the possibility to terminate their leases or delay rent payments under the theory of impossibility of performance. Impossibility of performance in Indiana excuses a tenant from its duties under the lease only when the performance of the covenants becomes absolutely impossible due to an act of God, an act of law or loss or destruction of the subject-matter. This is a high standard (compared to frustration of purpose which is the standard in other states) but may be met by non-essential businesses but not essential businesses such as restaurants. Even if impossibility of performance applies, the parties to the lease must still fulfill their other contractual duties to the fullest extent possible. It is very likely likely that the rent will only be excused until the government lifts the closure and that tenants will not be able to terminate their leases.
If you want to start the conversation with your landlord the first step is to review your lease, discuss with your insurance agent, and then contact your landlord to see what their stance is. Landlords will argue that a tenant still has access to the space and can operate another business in the location so the tenant should still be able to pay rent. The legal analysis will be textual analysis of the lease and depend upon the permitted use provisions, other excluded uses, and many other unique factors.
Contact us today at Fugate Gangstad if you want help navigating your options under your lease.