The COVID-19 pandemic has taken an especially hard toll on small retailers, which tend to have limited access to capital and minimal cash reserves. A March 30th survey by the National Federation of Independent Business found that the COVID-19 pandemic has negatively impacted 92 percent of small employers. About half the employers who participated in the survey can survive for no more than two months under current conditions.
Shopping center owners aren’t standing idly by in the face of this existential threat, and it’s not hard to understand why. Nearly 70 percent of shopping center tenants are small businesses that employ fewer than 10 people, according to ICSC. These small businesses play an outsize role in many shopping centers by helping distinguish one property from the next. “Small businesses are the heart and soul of our properties. They build long-lasting emotional connections with communities,” said Trademark Property Co. CEO Terry Montesi.
Many shopping center landlords are providing small-business tenants with some type of short-term rent relief, typically on a case-by-case basis, while steering them to resources designed to help them weather the economic storm and prepare for what’s expected to be a gradual return to normalcy.
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It all starts with communication between the parties.
COVID-19 is a threat of unprecedented proportions, a global pandemic jeopardizing health and economic stability around the world. The real estate and hospitality industries are important sectors in America’s economy, employing millions of people. The livelihood of employees and the viability of many real estate companies and quick-service restaurants is now in jeopardy.
The severity of the economic aftershock may be much more severe than it needs to be. Without short-term rent relief, many otherwise viable quick-serves may be forced to permanently shutter.
Social distancing has been one of the primary tools used to slow the spread of the coronavirus and “flatten the curve.” In order to effectively implement social distancing many shopping malls and retailers have been closed, impacting restaurants particularly severely.
Safe to say, the world as it is today is a vastly different place than it was when you first signed your commercial lease. Unforeseeable circumstances— sometimes referred to as ‘force majeure’ or ‘acts of god’— have a way of complicating business. With the recent social distancing and subsequent economic slowdown caused by the COVID-19 outbreak, many restaurants find themselves struggling to stay afloat.
One of the most crucial issues to deal with is how to make your contractual payments— such as your lease expenses— when your company is bringing in little to no revenue. There are very few businesses that can afford to sustain these payments during times of extreme economic stagnation.
While it can seem harsh for your landlord to keep demanding payments, it has to be remembered that they’re in a similar situation. Landlords also have large expenses, such as property insurance and mortgages, that they need to make monthly payments on; they rely on collecting rent from to make those payments.
Businesses — large and small — are being gutted by the COVID-19 pandemic and government restrictions to stem the tide of infection. Recent directives require that restaurants and bars close (with the exception of certain takeout and delivery services), that sporting, concert and other large-scale venues cease holding events, and that gyms shut their doors until further notice. Business disruption is a given, although the extent of its impact is an unknown.
As business owners and landlords assess the damage, they should review key aspects of their commercial leases. While some provisions may permit landlords to accelerate payment obligations or draw down letters of credit in the event of non-payment, others may create exceptions to continuous operation and other tenant covenants or present novel grounds to demand rent abatements under government taking theories.
Parties also should consider the practical impact of the pandemic on the legal system in devising a strategy on whether and how to enforce their rights. This calculation should take into account assistance that may be offered by federal, state and local governments to mitigate the impact of COVID-19 on businesses and their employees.
The Coronavirus Disease 2019 (COVID-19), is the latest viral outbreak affecting the physical and economic health of the world. With a global impact and over 1,600 reported cases identified in the United States (as of the date of this bulletin), the World Health Organization classified the outbreak as a pandemic on March 11, 2020.
COVID-19 belongs to the same classification of viruses which caused Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS) and has already had a significant impact on business operations throughout the country as state, local and national governments have declared states of emergencies, which include, halting of trade with China, cancellation of some domestic and international flights, closing of schools and public gathering places and many more daily disruptions that have had a swift impact on individuals and businesses.
As COVID-19 continues to spread across the United States and world, commercial tenants and landlords, as well as buyers and sellers of real estate will encounter challenges in meeting contractual obligations due to the fluid nature of the outbreak and governments’ continued and ever-evolving attempts to contain it. Landlords and tenants are actively analyzing the impact on supply chain reductions and decreased retail traffic due to “social distancing” mandates. Buyers and sellers face the possibility of travel restrictions preventing on-site third party due diligence review and site inspections as well as standard tenant interviews. Additionally, the containment efforts may disrupt debt availability from local and regional lending institutions and cause a possible back log of deed and mortgage filings in the event state and municipal government recording offices are required to close their doors. Relevant questions companies should address are (i) whether the failure to perform contractual obligations due to COVID-19 related causes constitutes a breach of contract or default, (ii) whether there is an exemption under contractual force majeure provisions for such pandemic causes, (iii) whether government or quasi-government (Civil Authority) directed closures and shut downs due to COVID-19 are covered by insurance and (iv) whether events caused by or related to COVID-19 constitute a material adverse change under the terms of a contract.
Force Majeure, Insurance, MAC Clauses are further discussed in this article.
Business Property Insurance
If you have some form of casualty insurance on property and equipment used in
your business, contact your insurance company or agent as soon as possible to notify them of losses to your covered business property. Photograph or videotape the damage to your business and space where it operates, as well as damage to your records, inventory, equipment, and any other loss.
Notify the landlord as soon as possible in writing if your leased property is damaged and if your
business was shut down as a result of disaster. Review your lease to determine whether it terminates or if there is a provision for rent reduction during a business interruption. If your lease doesn’t provide for temporary rent reduction, try to negotiate one with your landlord.
As a small business owner, you may have ongoing business obligations to vendors,
suppliers and customers while your business operations are interrupted. Whether your obligations may be suspended or terminated depends on the terms of the contract between you and those with whom you do business. Start by reviewing the contract.
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