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.\u00a0 These clauses are the provisions on damage and destruction and the provision on condemnation.<\/p>\n
Until this year\u2019s pandemic struck, when lease drafters considered damage and destruction they had in mind only physical damage or destruction.\u00a0 The building burns down: can the tenant terminate the lease?\u00a0 Must the landlord rebuild?\u00a0 Must the tenant continue to pay rent?\u00a0 If the building was not physically damaged, then the clauses on damage and destruction never came into play.<\/p>\n
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?\u00a0 Would rent be reduced?\u00a0 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.<\/p>\n
This spring\u2019s pandemic-related orders thread the gap between the Scylla of destruction and the Charybdis of condemnation.\u00a0 First, Scylla:\u00a0 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\u2019t been condemned \u2013 or has it?\u00a0 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.\u00a0 In the landmark case of First English Evangelical Lutheran Church v. County of\u00a0 Los Angeles<\/em>, 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.\u00a0 Our enterprising tenant might continue the argument: if the government\u2019s 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.<\/p>\n The alert landlord might respond that the government never evicted the tenant \u2013 the tenant continued to possess the leased space, even if it couldn\u2019t admit any customers or make any sales.\u00a0 If the tenant never lost possession, then the tenant\u2019s leasehold was not condemned, and the tenant can\u2019t terminate the lease.<\/p>\n What would a court decide?\u00a0 We\u2019ll know the answer in a year or two when a case gets to a judge.<\/p>\n Let\u2019s move on to Charybdis and the destruction clause.\u00a0 What is \u201cdestruction\u201d?\u00a0 It includes physical destruction by fire or flood.\u00a0 Sometimes (you may be reading your own lease now) it includes \u201cor other physical event which makes the premises untenantable for the uses allowed under this lease.\u201d<\/p>\n 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.\u00a0 Is the pandemic a \u201cphysical event\u201d?\u00a0 The viruses do have a physical existence.\u00a0 If our ingenious tenant doesn\u2019t 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.<\/p>\n Tenants affected by the pandemic and the shutdown orders (which means nearly everyone) can\u2019t renegotiate the destruction and condemnation clauses in their leases.\u00a0 Prospective tenants, however, will want to pay close attention to these clauses in their new leases before they sign them.<\/p>\n","protected":false},"excerpt":{"rendered":" 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.\u00a0 These clauses are the provisions on damage and destruction and the provision on condemnation. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,2],"tags":[],"class_list":["post-181","post","type-post","status-publish","format-standard","hentry","category-leasing","category-real-estate"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/alterman.law\/blog\/wp-json\/wp\/v2\/posts\/181","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/alterman.law\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/alterman.law\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/alterman.law\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/alterman.law\/blog\/wp-json\/wp\/v2\/comments?post=181"}],"version-history":[{"count":1,"href":"https:\/\/alterman.law\/blog\/wp-json\/wp\/v2\/posts\/181\/revisions"}],"predecessor-version":[{"id":182,"href":"https:\/\/alterman.law\/blog\/wp-json\/wp\/v2\/posts\/181\/revisions\/182"}],"wp:attachment":[{"href":"https:\/\/alterman.law\/blog\/wp-json\/wp\/v2\/media?parent=181"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/alterman.law\/blog\/wp-json\/wp\/v2\/categories?post=181"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/alterman.law\/blog\/wp-json\/wp\/v2\/tags?post=181"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}