COVID-19 and Contracts - Practical Issues in Maryland

In unprecedented times like this, the allocation of loss will become particularly important.  For example, Yahoo (and others) reported that the Cheesecake Factory has notified its landlords that it would not pay rent for April (link here).  Other commercial tenants have sought adjustments, as well.  However, landlords likely have obligations and carrying costs that they still have to meet.

While parties will resolve most of these disputes (either with or without counsel), litigation is inevitable. Some points to consider:

            •           Carefully examine the contract to ensure compliance with any notice or mitigation requirement. For example, construction contracts almost always have strict notice provisions. Failure to comply may result in losing significant rights.

            •           Both large and small businesses are going to be impacted.  Arguing that the larger business should take the brunt of the loss because it has the resources will not get a smaller business very far.  Some amount of loss will have to be shared. While larger businesses likely have the resources to wait it out and, thus, will have increased bargaining power, they are also in a better position to offer more concessions.

            •           Commercial landlords don’t want an empty space.  Deferring rent with a future repayment obligation is usually better than having the tenant vacate and the space going dark. This is an especially strong argument when the tenant has had a good working relationship with the landlord in the past. Also, think outside the box. Can the tenant utilize part of the security deposit as rent? Will the landlord accept an extended term in lieu of immediate rent?

            •           Is there insurance available to cover the losses and interruptions to business operations? If so (or even arguably so), this can be an important tool. Again, loss that can be spread out is usually more palatable to all parties.  

            •           The threat of bankruptcy always looms, especially in commercial real estate. If a party files bankruptcy, the counterparty most likely has only an unsecured claim and a significantly discounted recovery. With commercial leases, the tenant has the option (so long as the landlord hasn’t terminated the lease under state law) to assume or reject the lease after filing bankruptcy.  The Bankruptcy Code also provides landlords and tenants with several other important rights and obligations.

The country will eventually reopen, and business will restart.  With it, however, will come the inevitable tide of litigation over disputes that could not be resolved.  Now is the time to carefully review contracts and leases, and begin working towards resolutions.