Month: August 2020

Commercial leases, COVID-19, and shutdowns: condemnation or casualty?

One effect of COVID-19 on the world of commercial real estate has been to move two lease clauses from the boring bits of boilerplate in the rearguard of the lease to be front and center in the minds of the negotiators.  These clauses are the provisions on damage and destruction and the provision on condemnation.

Until this year’s pandemic struck, when lease drafters considered damage and destruction they had in mind only physical damage or destruction.  The building burns down: can the tenant terminate the lease?  Must the landlord rebuild?  Must the tenant continue to pay rent?  If the building was not physically damaged, then the clauses on damage and destruction never came into play.

Similarly with the condemnation clause: if the government took a portion of the leased premises, or a portion of the project in which the leased premises were located, could the landlord or tenant terminate the lease?  Would rent be reduced?  If the government never took possession of part of the premises or of the larger project, then the condemnation clause did not come into play either.

This spring’s pandemic-related orders thread the gap between the Scylla of destruction and the Charybdis of condemnation.  First, Scylla:  if the government bars the tenant from doing business without regard to whether the property itself is an actual danger (think of the shuttered restaurants), then the property hasn’t been condemned – or has it?  An ingenious tenant might argue that the government has temporarily condemned its property for the public good, and a temporary taking entitles the property owner to compensation.  In the landmark case of First English Evangelical Lutheran Church v. County of  Los Angeles, 482 US 304 (1987), the United States Supreme Court held that a county that temporarily prohibited a landowner from all use of its property could be required to compensate the landowner for damages for the temporary taking of its property, even though the government itself never occupied the property.  Our enterprising tenant might continue the argument: if the government’s order to shut its business is a temporary taking under the United States constitution, and therefore a condemnation, the order should equally be a condemnation for purposes of the lease, and if the lease entitles the tenant to terminate the lease in response to a condemnation, then the tenant can terminate the lease.

The alert landlord might respond that the government never evicted the tenant – the tenant continued to possess the leased space, even if it couldn’t admit any customers or make any sales.  If the tenant never lost possession, then the tenant’s leasehold was not condemned, and the tenant can’t terminate the lease.

What would a court decide?  We’ll know the answer in a year or two when a case gets to a judge.

Let’s move on to Charybdis and the destruction clause.  What is “destruction”?  It includes physical destruction by fire or flood.  Sometimes (you may be reading your own lease now) it includes “or other physical event which makes the premises untenantable for the uses allowed under this lease.”

COVID-19 did not itself make any commercial space untenantable, but the pandemic did lead to state and local government orders that did make many commercial spaces untenantable.  Is the pandemic a “physical event”?  The viruses do have a physical existence.  If our ingenious tenant doesn’t succeed at arguing that the government shutdown orders are condemnations, it might win the argument that the virus itself is a physical event that caused the premises to become untenantable, entitling the tenant either to a rent abatement or to terminate the lease itself.

Tenants affected by the pandemic and the shutdown orders (which means nearly everyone) can’t renegotiate the destruction and condemnation clauses in their leases.  Prospective tenants, however, will want to pay close attention to these clauses in their new leases before they sign them.

Best Lawyers® recognizes Alterman and Menze for 2021

Alterman Law Group is pleased to announce that Dean N. Alterman has been recognized in the 2021 edition of The Best Lawyers In America®  for Real Estate Law, and that Erica N. Menze has been recognized in the inaugural edition of Best Lawyers  – Ones to Watch for Real Estate Law and Litigation – Real Estate.

Best Lawyers was first published in 1983 and its rankings are based on an exhaustive peer-review process.Erica Menze,