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After several weeks of restrictive measures implemented tomitigate the effects of the coronavirus (COVID-19)pandemic—including the closure of non-essential businesses andorders to "shelter in place"—business owners are increasingly beingrequired to make difficult decisions in the face of significantliquidity shortfalls. In particular, commercial tenants areweighing the decision to abandon premises they lease or to withholdrent due to their landlords, which decisions raise a number oflegal issues. Tenants have considered various legal theories tosupport rent abatement and lease termination claims, though at thispoint in the process, many tenants have come to agreement withtheir landlords on interim relief.

Negotiated Settlements

As a consequence of the substantial, in some cases complete,loss of revenues for many tenants, commercial landlords havegenerally taken a pragmatic approach, which is also driven bylimited access to the courts and a perception that courts will notbe sympathetic to any attempt to evict tenants based onpandemic-related defaults. Another factor for landlords is thebelief that it will be quite difficult to replace an existingtenant in this environment.

Many commercial landlords and tenants have agreed to modify theterms of their leases in order to provide short-term relief totenants, especially those in the retail sector. Among other things,parties have agreed to (i) short-term (e.g., 30-90 day) rentdeferrals, with deferred rent to be repaid either in lump sums orin installments with varying repayment terms, (ii) short-term rentreductions, (iii) lease extensions coupled with free rent tocommence now (so called "blend and extends"), (iv) negotiated leaseterminations (often for stipulated sums), and (v) some combinationof the foregoing. Landlords typically prefer to defer rent (even ifforgiven at a later date) rather than grant an abatement topreserve the landlord's claim in a bankruptcy of the tenant.

Legal Theories for Lease Terminations and Rent Abatements

In the absence of a negotiated agreement, commercial landlordsand tenants should carefully review their leases to determinewhether a tenant has the explicit contractual right to terminateits lease or withhold rent. If none exists and the tenant is unableto – or for strategic reasons elects not to – abide by the terms ofthe lease, the tenant may try to assert a common law defense tonon-payment or abandonment.

Cotenancy Provisions. Retail leases (inparticular, for shopping centers) may contain cotenancy provisionsthat, if triggered, permit the tenant to pay a lower rent and insome cases to terminate the lease. A cotenancy clause will usuallybe triggered by a failure of the overall building or center to meetan agreed occupancy threshold for a specified duration, such asfewer than a designated number of anchor tenants open and operatingand/or less than a designated percentage of gross leasable areathen open and operating. In many cases the cotenancy trigger allowsthe tenant to convert to paying percentage rent (i.e., a statedpercentage of gross sales) in lieu of the stated base rent in thelease for the duration of the trigger condition. Cotenancyprovisions also often permit termination of the lease if thetrigger condition continues for an extended period of time(typically 6-18 months).

Force Majeure Clauses. If a contract contains aforce majeure clause, such clause may excuse a party'snonperformance under the contract when extraordinary events preventsuch party from fulfilling its contractual obligations. Tenants maytry to avail themselves of such clauses, which are commonlyincluded in commercial leases, as a means of excusing non-paymentof rent under current circumstances. There are two major caveats totenants invoking force majeure clauses to abate rent. First, andmost importantly, force majeure clauses typically apply only toperformance obligations and not to payment obligations. In fact,force majeure clauses in leases often expressly provide that theydo not apply to monetary covenants, such as a covenant to pay rent.Second, while the force majeure landscape may be significantlyaltered as a result of the COVID-19 pandemic, there is generally ahigh bar for a party to invoke such clauses, which are typicallynarrowly construed. Courts are reticent to expand the list ofcovered events that constitute a force majeure beyond thosespecifically enumerated in a lease. Thus, where a lease'sdefinition of force majeure does not explicitly include epidemicsor pandemics, governmental restrictions, or other pertinentcircumstances, the tenant may be unsuccessful in invoking a forcemajeure clause under the current circumstances.

Clauses Concerning Casualty or Condemnation.Commercial leases may permit a tenant to terminate its lease, orprovide for an abatement of rent for a period of time, if all or amaterial portion of the demised premises is damaged in a casualtyor is condemned by the government.

While tenants may try to argue that the actual or potentialpresence of COVID-19 within the demised premises constitutes damagefrom a casualty, this would represent a significant departure fromthe typical application of a standard casualty clause. Broaderlease provisions that refer to "untenantability" of – rather thanphysical "damage" to – the leased premises could potentiallysupport a different outcome, but it is far from certain that atenant would be entitled to terminate its lease under such aprovision. In interpreting statutes that allow a tenant (usually inthe absence of a casualty provision in the applicable lease) toterminate its lease because a casualty has rendered the premisesunfit for occupancy, courts have resisted claims that the presenceof an epidemic constitutes adequate grounds for such a termination.(See 61 A.L.R.2d 1445 (originally published in 1958) (outliningcases in which courts dismissed arguments that scarlet feverepidemics permitted tenants to terminate their leases).

If a government takes possession of private property in order touse it as (for example) a hospital, a testing site or adistribution center, a displaced tenant may well be permitted underits lease to terminate or to obtain an abatement for the durationof its displacement. In contrast, it is far less clear that atenant would succeed in arguing that a forced closure or similaraction (without acquisition of title or possession) for a publicuse constitutes a temporary taking of the demised premises forpurposes of a condemnation provision. If it were to represent ataking for such purposes, then the tenant may be entitled totermination or an abatement in this case as well.

Constructive Eviction or Breach of Covenant of QuietEnjoyment. Tenants may attempt to invoke the common lawdoctrine of constructive eviction and claim breach of the covenantof quiet enjoyment. In order to avail itself of one of thesetheories, the tenant must typically show fault on the part of thelandlord. The presence of a contagious disease and the impositionof governmental restrictions to combat it are unlikely to besufficient.

However, a landlord's negligence in addressing the risk ofcontagion during this pandemic may support a tenant's claim underone of these doctrines. At least one court has expressed awillingness to consider a tenant's right to terminate a lease onthe basis that the landlord affirmatively introduced a disease ornegligently omitted to take precautions to prevent its spread. (SeeMajestic Hotel Co. v. Eyre, 65 N.Y.S. 745 (N.Y. App. Div. 1st Dep't1900). Landlords should thus be mindful of the potential legalimplications of failing to take appropriate action to protect thehealth of tenants during a pandemic.

Unless the applicable lease provides otherwise, a tenant'scontinuing to operate its business at the premises (although notnecessarily its keeping items at the premises) will typicallypreclude the tenant from claiming constructive eviction or at leastcreate a presumption of tenantability. (See 2 N.Y. Landlord &Tenant Incl. Summary Proc. §25:28 (5th ed.); 74 N.Y. Jur. 2dLandlord and Tenant § 409. Although it may be possible in somejurisdictions to assert a breach of the covenant of quiet enjoymentwhile a tenant remains in possession of the premises, continuedoperation may well serve to weaken a tenant's case. (See AlexanderG. Tselos, Breach of Quiet Enjoyment Can Constitute ConstructiveEviction, THE LEGAL J. FOR RETAIL REAL ESTATE (Spring 2017)).

Frustration of Purpose. Tenants may also try toinvoke the common law doctrine of frustration of purpose in seekingto terminate their leases. If a lease limits the tenant to aparticular use (or, in some jurisdictions, if the partiesspecifically contemplated a particular use when they executed thelease), and a subsequent prohibition precludes such use, the tenantmay be able to show that the purpose of the lease has been sofrustrated that the lease is void or voidable. (See Restatement(Second) of Property: Landlord & Tenant §§ 9.2, 9.3 (1977, Oct.2019 update); 74 N.Y. Jur. 2d Landlord & Tenant § 49 (Feb. 2020update); 1 N.Y. Landlord & Tenant Incl. Summary Proc. § 2:15(5th ed.)).

Typically, however, a tenant cannot avail itself of thisdoctrine if the lease permits the tenant to use the demised spacefor one or more purposes that remain lawful. (See Restatement(Second) of Property: Landlord & Tenant § 9.3; 74 N.Y. Jur. 2dLandlord & Tenant §49 (Feb. 2020 update)). A tenant willgenerally be required to show that it would be unreasonable tocontinue to bind the tenant. (See Restatement (Second) of Property:Landlord & Tenant §9.3). In assessing the severity of thehardship that a given restriction would inflict on a tenant, courtshave examined, among other things, the anticipated duration of therestriction, any exemptions available to the tenant, and whetherthe restriction was foreseeable at the time the parties enteredinto the lease. (See, e.g., Gardiner Properties v. Samuel Leider& Son, 111 N.Y.S.2d 88 (N.Y. App. Div. 1st Dep't 1952); seealso 30 Williston on Contracts § 77:96 (4th ed.) (addressingforeseeability)).

Even if some commercial tenants can terminate their leases underthis doctrine, it would be a novel application to use this conceptto allow tenants to abate rent for the duration of a forced closurewithout terminating their leases. While crises of this magnitudecan lead to changing legal interpretations, tenants should not stopmaking rental payments on the assumption that this doctrine willpermit them to do so without terminating their leases.

Remedies Available to Landlords

In the absence of a negotiated arrangement, some tenants areelecting to abandon the leased premises or withhold rent, either ofwhich typically constitutes a breach of the applicable lease.Depending on the terms of the lease, the tenant may have a cureperiod, although any cure periods for such breaches are generallyshort. If a tenant has no notice or cure right or remains in breachbeyond the applicable notice or cure period, the landlord may beginto draw down on any security posted with the landlord (usually inthe form of a cash security deposit or letter of credit), sue thetenant and/or any guarantor for damages, and/or initiate evictionproceedings.

Limitations on the Exercise of Remedies

As a practical matter, landlords wishing to recover damages orevict tenants may be precluded from doing so under currentconditions. Courts across the country have significantly curtailed"non-essential" judicial proceedings. (See Ryan Tarinelli, New YorkCourt System Plans to Relax Coronavirus Restrictions, Law.com(April 9, 2020 3:22 PM); Chava Gourarie, New York State HaltsEvictions and Foreclosures Indefinitely, COMMERCIAL OBSERVER (March16, 2020)). For example, an indefinite suspension of filing neweviction proceedings in New York remains in place (Id.), andGovernor Andrew Cuomo issued an executive order prohibiting theenforcement of residential and commercial evictions andforeclosures at least through June 15, 2020. (Executive Order No.202.8, State of New York Executive Chamber(https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/EO_202.8.pdf)).

Even in the absence of such policies, the courts' capacity tohear and process cases brought by landlords may be compromised byshortages of personnel and other resources. The inability oflandlords to exercise remedies for a period of time, however, doesnot affect tenants' underlying obligations to pay rent andotherwise comply with their leases, and landlords will at somepoint be able to enforce their leases through the courts and, inmany cases, charge default interest on delinquent payments.

Alternative Sources of Relief

In all events, tenants and landlords alike should consider theavailability of alternative sources of relief, including insurancepolicies, potential claims of just compensation for regulatorytakings, and federal, state and local programs designed to assistailing businesses during these trying times. In particular,eligible tenants should consider seeking loans from the SmallBusiness Administration's "Paycheck Protection Program," whichpermits a portion of funds to be used for rent. (It is anticipatedthat no more than 25% of loan proceeds may be used for non-payrollpurposes, including rent. Seehttps://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf..).

Some landlords have conditioned rent relief on the tenantapplying for assistance under the relief programs. In anynegotiated agreement, landlords should consider making sure thattenants do not "double dip" by obtaining a rent abatement ordeferral from the landlord along with governmental relief intendedto enable the tenant to make the landlord whole.

There may well be limitations on parties' ability to recoverinsurance proceeds based on the existence of a pandemic and/orgovernmental actions to combat it. For example, policies ofbusiness interruption insurance may provide coverage only in thecase of physical damage to property by casualty and/or containspecific exclusions for epidemics. Consistent with the advice ofthe Real Estate Board of New York, however, parties should reviewtheir insurance policies to determine what claims might beavailable to them and promptly notify their insurers of thoseclaims.

Peter E. Fisch and SalvatoreGogliormella are partners at Paul, Weiss, Rifkind,Wharton & Garrison LLP. Peter S. Borock, an associate atthe firm, assisted in the preparation of this article.