Governor Newsom Closes California. Where Does That Leave Commercial Tenants?

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On Thursday evening, California Governor Gavin Newsom issued Executive Order N-33-20 in response to the ongoing coronavirus crisis, requiring all residents in the state to stay home or at their place of residence, except as needed to maintain the continuity of operations of 16 critical infrastructure sectors. Grocery stores, pharmacies, and banks will stay open, but much of California commerce will grind to a halt as residents shelter in place.

If you are a commercial tenant in California, it is time to start thinking about whether you can pay your rent and meet your other lease obligations in this time of diminishing commercial activity.

Tenants are likely to face a number of challenges in light of the statewide shelter-in-place order, including difficulty paying rent, forced closures of retail stores that may violate continuous operations covenants, and inability to complete construction of required tenant improvements.

Here is a brief playbook for commercial tenants dealing with coronavirus related disruptions in California:

Communicate Early and Often

Reach out to your Landlord. Landlords are grappling with the same issues as their tenants and are themselves trying to figure out how to deal with market disruptions. Connect with them early and partner with them to find solutions to the issues you are confronting. Landlords may also find it difficult to meet maintenance, construction or other obligations under their leases and tenants should be able to negotiate mutually beneficial solutions with these landlords.

Some proactive landlords have already begun contacting tenants and proposing accommodations, like suspension of mandatory operating hours for retail tenants.

If you are unable to reach your landlord by telephone, send them a written notice indicating any issues you may be experiencing and proposing solutions. If you operate multiple locations under multiple leases, consider preparing a form notice to be sent to all of your landlords. Remember to expressly reserve all of your rights under your lease and under law when you send a written notice.

Read Your Lease

Be sure to read your lease. Whether your issue is inability to pay rent, forced closure of your store or office, or inability to complete construction projects, the answer to your problem may be sitting in your lease. Below are examples of potentially helpful lease provisions:

• Rental Abatement Provisions -- Many leases contain rental abatement provisions that may excuse your obligation to pay rent if your landlord fails to deliver required services or interferes with your access to your premises.
• Co-Tenancy Provisions -- If you are a retail tenant, your lease may include a co-tenancy provision. If the tenants identified in the co-tenancy provision cease operating, you may be entitled to a rental abatement or relief from your own covenant to maintain continuous operations.
• Force Majeure Provisions -- Many leases contain “force majeure” provisions that can excuse your performance if an event or circumstance occurs that is beyond your control and that keeps you from performing your obligations. While every force majeure clause is drafted differently, many will be drafted broadly enough to include a forced closure by government regulation. Most force majeure clauses expressly exclude the payment of monetary obligations, so force majeure likely will not help you with rent, but it may help you with other obligations under your lease.
• Construction Provisions -- If you are in the midst of building out your space, this is likely to be an even more stressful time for you. Examine your work letter carefully. Determine what deadlines you need to meet and what deadlines your landlord must meet. Look for concepts like “landlord delay”. Some landlord activities may delay the time for your performance. Look to see if force majeure provisions might help you. Check to see if cost-overruns are discussed to see who bears the extra costs caused by delays in construction.
• Lease Surrender Provisions -- If the end of your lease term is approaching, check the surrender and holdover provisions of your lease. Some of these provisions let landlords sell your property if it is not removed from the premises within a certain period of time. Look to see if you have a force majeure provision that may mitigate your obligation to remove your property by a certain date. Most leases also provide for holdover rent that is higher than normal base rent. While you will still have to pay rent during any holdover, a force majeure provision might excuse you from paying extra holdover rent.

Get Creative

If your lease does not include provisions that help solve your leasing difficulties, get creative and propose solutions to your landlord. Most are willing to listen and some are already trying to figure out how to help you weather this storm.

Suggest a rent holiday, for example, during which you pay no rent. Most landlords would rather have you in business for the long term even if it means forgoing rent in the short term. If you can pay some of your rent, suggest a reduced rental rate rather than a full rent holiday. Or suggest that you pay only your share of operating expenses, rather than the full amount of rent. If your landlord is not willing to forgive rent, suggest that your term be extended for the duration of any rent holiday you receive. This will enable the landlord to recover lost rent at the back end of the lease. You could also suggest that the rent you would have paid during the rent holiday be treated as a loan. It can be amortized and paid in monthly installments over the term of the lease once you are able to commence paying rent again.

If you are a retail tenant, ask for relief from lease covenants requiring you to open for a minimum number of hours or days. If you are in the midst of a tenant improvement build-out, ask for more time and relief from milestone deadlines. If you are having difficulty financing the improvements, discuss a new or increased tenant improvement allowance with your landlord. Most landlords would rather avoid having incomplete construction in their buildings.

If all else fails, you can begin to look at common law doctrines that could help you avoid certain of your lease obligations. California, for example, recognizes the doctrine of “impracticability” which excuses performance when it has become impracticable due to excessive and unreasonable difficulty and expense. Proving impracticability, however, can be difficult and requires a detailed fact-based analysis.