3-26-20 The Impact of COVID-19 on Residential and Commercial Leases

The Impact of COVID-19 on Residential and Commercial Leases

Pursuant to Executive Order Number 202.8 issued on March 20, 2020 by Governor Andrew Cuomo, effective March 22, 2020 there shall be no enforcement of an eviction against a commercial or residential tenant for a period of ninety (90) days. When coupled with the several judicial administrative orders that have recently been issued limiting court applications to narrowly defined circumstances during the COVID-19 crisis, landlords must be wondering what this all means. Is it open war on landlords and tenants can now do what they like, when they like? Are tenants released from their obligations to pay rent? Of course not. Both residential and commercial tenants are still under contract and must still honor the terms of their leases. But what about a tenant who is not complying with its obligations? What recourse does a landlord have at this time when the courts have stayed all eviction proceedings? Is self-help an option? Or is there some other practical solution?

To begin, the Statewide Housing and Tenant Protection Act of 2019 specifically prohibits the use of self-help by a landlord of residential housing and imposes a maximum fine of $10,000. The Act defines self-help to include lockouts, shutting off utilities or engaging in "a course of conduct which interferes with or is intended to interfere with or disturb the comfort, repose, peace or quiet of such occupant in the use or occupancy of the dwelling unit." In addition, any residential landlord that decides to reduce basic services (i.e., sanitation, heat, electric, water, etc.) which the landlord is currently under an obligation to provide and which affects the safety or wellbeing of a tenant may be in breach of the warranty of habitability implied in every residential lease.

From a commercial landlord's perspective, the Statewide Housing and Tenant Protection Act of 2019 does not expressly prohibit self-help measures, nor is there an implied warranty of habitability in a commercial lease. However, there is the possibility that a commercial landlord that resorts to the remedy of self-help at this time may later be found to have violated the Governor's Executive Order prohibiting the enforcement of an eviction, or the commercial landlord's act of self-help may violate the terms of its lease. Indeed, even in times of economic stability most courts have frowned upon a commercial landlord use of self-help unless such right is clearly expressed in the commercial lease and it can be accomplished without a breach of the peace (generally defined as the fear or threat of physical force). Further, a commercial landlord who elects to reduce its services (e.g., heat, electric, tenant access ) or ignores its contractual obligations because its tenant has stopped paying the rent will not be technically breaching a warranty of habitability (because there is no such warranty in a commercial lease), but it may be putting itself in breach of its contractual obligations or engaging in conduct that our courts characterize as a "constructive" eviction.

Of course a commercial tenant often promises to do more than simply pay rent. There are often insurance covenants, maintenance covenants and other promises a commercial tenant makes that it may be choosing to ignore because of the COVID-19 crisis. Any tenant who assumes that such breaches can be or will be later excused by a court of law will likely be disappointed. (See our Client Alert discussing force majeure contract clauses clauses.) So what should a landlord be doing right now?

First, document all non-performance issues and notify those tenants of their default, just as you would in your "pre COVID-19" business practice. Second, consider those enforcement rights that are permitted under your lease short of an eviction, including (following proper notice) exercising rent acceleration and/or lease termination options. Third, consider a negotiated peaceful surrender of possession back to the landlord. Fourth, consider restructuring your tenant's lease payments by deferring some rent into the future. In such instances, be sure to properly memorialize all forbearance agreements. Fifth, think of this as an opportunity to improve your bargaining position by insisting upon additional guarantees and confessions of judgment. And if you are a commercial tenant, consider the idea of lease restructuring and rent deferment as a bargaining chip to salvage the business you have worked so hard to build.

Of course, many of these ideas will require skillful drafting to implement. Regardless of whether we represent you in your capacity as a commercial or residential landlord or as a commercial tenant, we can help you memorialize these solutions and provide the best advice to create a win/win situation for both sides of the equation.

*Note: As of this writing there is a proposed State Senate bill that would suspend rent payments for any residential or small commercial tenant for 90 days with the potential for a qualifying landlord to seek a reduction in its own mortgage payments during the covered period. We will update our alerts if such proposal or any variation of it is passed.

Please contact your Woods Oviatt attorney or the attorneys listed below regarding this or any COVID-19 related issues.

For more information regarding Coronovirus (COVID-19) or to access all of our client alerts go to:

https://www.woodsoviattgilman.com/practices/covid-19-multidisciplinary-crisis-group

COVID-19 Multidisciplinary Crisis Group Co-Leaders