By: Ethan Katz
There has been a small group of companies possessing a business model predicated on having consumers stay at home that have been able to thrive during the COVID-19 pandemic. A prime example of such a company is Netflix, with the company’s stock reaching an all-time high in April.[1] However, success stories like this have been outliers, as many businesses have struggled to cover expenses such as rent and payroll.
Commercial real estate is one sector that has been forced to rapidly adapt their business practices as a result of the pandemic. As of Friday, April 17th, approximately 51% of retail tenants had paid their rent for the month of April, a sharp decline compared to the 85% who had paid their rent for the month of March.[2] Many tenants and potential real estate purchasers have claimed that the pandemic represents a force majeure event that excuses them from their contractual obligation.[3] A force majeure clause is a contractual provision that “typically spell[s] out extraordinary circumstances that can excuse a party from contractual obligations, including natural disasters and disruptions such as war, rioting, terrorism or government interventions.”[4] In a suit recently filed in Los Angeles County Superior Court, a retail developer is relying on force majeure in an attempt to delay the purchase of an 120-acre property in Culver City.[5] It should be noted that at this point, it still unclear if the pandemic will be encompassed by force majeure clauses, and if this can be used to excuse rent payments and contractual obligations associated with real estate purchases.[6]
Some landlords and tenants have taken a different approach, and are attempting to negotiate revisions to their leases to facilitate the deferment, reduction or forgiveness of rent payments.[7] In an effort to prevent their tenants from going out of business, some landlords are waiving rent for the coming months, but requiring the tenants to pay back the amount in the next year.[8] But before they offer relief to their tenants, the landlords are requiring the tenants to provide sales figures and other financial information to prove they are in need of assistance.[9] Unfortunately, some landlords are limited in their flexibility due to agreements with their mortgage lenders that do not allow them to modify their rent prices without consent from the lender.[10]
Even the teams in the National Basketball Association, which have an average value of $2.12 billion[11], have had to alter their business operations and payroll as a result of the coronavirus. On April 17th, the league and the player’s union reached an agreement which will cut each player’s paychecks by 25% if play does not resume.[12] The withheld money will be held in an escrow account and returned to players in the event that games are rescheduled.[13]
These creative solutions show the importance of flexibility and willingness to negotiate in the face of such an unprecedented scenario. That being said, there will undoubtedly be a staggering number of contractual claims flooding the courts in the months and years following the crisis. Many of these lawsuits will turn on how the courts interpret various force majeure clauses in contracts, which will certainly be a pivotal topic for lawyers and business owners alike.
[1] Ariel Shapiro, Netflix Stock Hits Record High, Is Now Worth More Than Disney, Forbes (Apr. 16, 2020), https://www.forbes.com/sites/arielshapiro/2020/04/16/netflix-stock-hits-record-high-is-now-worth-more-than-disney/#39517f444b26.
[2] Aisha Al-Muslim, Landlords, Commercial Tenants Negotiate Rent Breaks Amid Coronavirus Disruption, Wall St. J. (Apr. 20, 2020), https://www.wsj.com/articles/landlords-commercial-tenants-negotiate-rent-breaks-amid-coronavirus-disruption-11587375005.
[3] Id.
[4] Jacob Gershman, Coronavirus Contract Disputes Start Hitting the Courts, Wall St. J. (Apr. 20, 2020), https://www.wsj.com/articles/coronavirus-contract-disputes-start-hitting-the-courts-11587375001
[5] Id.
[6] Id.
[7] Al-Muslim, supra note 2.
[8] Id.
[9] Id.
[10] Id.
[11] Kurt Badenhausen, NBA Team Values 2020: Lakers and Warriors Join Knicks in Rarefied $4 Billion Club, Forbes (Feb. 11, 2020), https://www.forbes.com/sites/kurtbadenhausen/2020/02/11/nba-team-values-2020-lakers-and-warriors-join-knicks-in-rarefied-4-billion-club/#9502c032032f
[12] Adrian Wojnarowski, NBA Players to Receive 25% Less in Paychecks Starting May 15, ESPN (Apr. 17, 2020), https://www.espn.com/nba/story/_/id/29050090/under-plan-nba-players-receive-25-less-paychecks-starting-15.
[13] Id.
