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Post-Pandemic Primer: How to negotiate leases now

Retail tenants entering into new leases should demand greater protection against future pandemics.

When retail tenants found themselves in the unfortunate position of being unable to open for business as a result of the COVID-19 pandemic, they naturally rushed to review their leases for provisions that could offer relief from rent obligations. Most tenants found that their leases offered very limited help at best. As the economy emerges from COVID-19, tenants entering into leases have the opportunity to proactively negotiate certain provisions in order to better protect their businesses in the event of future pandemics. Here are four such provisions:

Force Majeure. A force majeure clause removes a party’s liability for nonperformance of a contract if a specified unforeseeable circumstance occurs, such as a natural disaster, war, embargo, labor strike. Typically, the party that is unable to perform as a result must notify the other party and take commercially reasonable actions, if possible, to avoid or remove the causes of nonperformance. It is surprising then, perhaps with the benefit of hindsight, that prior to COVID-19, force majeure clauses often lacked express language covering a pandemic.

When negotiating new leases, tenants should insist that the force majeure clause expressly include “pandemics, epidemics, public health emergencies, local disease outbreaks, and mandatory federal, state, county or local government responses thereto, including without limitation quarantines and stay-at-home orders” (or similar language) in the list of circumstances that excuse a party’s performance.

Force majeure clauses typically also contain a provision that even if a specified unforeseen circumstance does occur, the payment of monetary obligations (in this case, rent) is not excused. Tenants can soften this by requiring that the parties agree to amend the lease in order to provide for equitably reduced rent if the business must operate in a limited capacity or does not have the ability to operate at all, as a result of a pandemic.

Condemnation. Condemnation clauses address what happens when the government takes control of all or a portion of the premises for a public purpose – usually called a “taking” or a “condemnation.” If this occurs, a landlord or tenant is usually permitted to terminate the lease or abate rent. Does a government-imposed stay-at-home order constitute a condemnation that offers a tenant relief from paying rent? Many tenants have argued that it does, although it is unclear how successful that argument will be until more cases move through the courts.

Traditionally, condemnation clauses have contemplated takings via “eminent domain,” in which the government physically annexes all or a portion of the premises (i.e., a transfer of title occurs), as opposed to a “regulatory” taking, in which a government action interferes with the operation of the premises – the latter clearly being more relevant here.

When negotiating a lease, tenants should pay particular attention to the condemnation provision and seek to include specific language, similar to the example given for force majeure above, that government actions and orders in response to a pandemic constitute a regulatory taking that will entitle the tenant to either temporarily abate or equitably reduce rent payments.

Use Clauses. On the most basic level, use clauses set forth the purposes for which the tenant may use the leased premises. Relatedly, leases often specify how the tenant must use the premises – that the business must be continuously operated for the duration of the lease, for a minimum time period, or during certain specific hours, for example.

Furthermore, if a tenant is granted an exclusive use, a lease might provide that exclusive use is forfeited if the tenant fails to continuously operate, allowing the landlord to lease to another tenant for an otherwise restricted use.

Tenants should review and negotiate these provisions carefully – a tenant would be wise to seek a narrowly drafted use clause to strengthen any argument that a pandemic-related mandatory shutdown constitutes a regulatory taking. Additionally, tenants should ensure that a prolonged inability to operate at the premises does not inadvertently cause a default under other related requirements of the lease.

Health and Wellness Amenities. Tenants now also have leverage to require landlords to provide an enhanced level of health and wellness benefits and services for personnel working at the premises. This is especially important in the retail sector, where employees work in open spaces and in proximity with each other and the general public. Tenants are advised to negotiate for state-of-the-art HVAC filtration systems, contactless payment technology, contact-tracing systems, temperature monitoring stations, and enhanced cleaning and sanitization of common rooms and areas.

As the country and the economy continue to move toward a post-COVID-19 reality, retail tenants are urged to consider how their leases came up short in meeting the challenges presented by the pandemic, and to negotiate for provisions in their leases leaving them well-positioned to overcome those challenges should a pandemic occur in the future.

Jonathan Pisha, an attorney with Shapiro Lifschitz & Schram in Washington, D.C., works with businesses on their commercial real estate matters. He may be reached at [email protected].

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