By: John R. Wise
Companies everywhere are presented with economic pressures by the COVID-19 pandemic. The Maryland commercial leasing community is working on two fronts to confront these challenges: lease restructurings and insurance claims. Many landlords and tenants have already examined their lease documents to determine their rights and liabilities in these unique circumstances. As the crisis has continued, savvy parties are looking to insurance to determine if coverage exists for COVID-19-related losses. Two lessons are emerging: (a) parties should document any restructuring of lease obligations in writing (always advisable but especially now); and (b) an insurance company’s denial of coverage should not be accepted as the final word on the matter. This article will briefly examine commercial lease restructurings and possible insurance coverage for commercial landlords and tenants.
Lease provisions which may be applicable include:
- Force majeure. These clauses excuse performance due to events outside the reasonable control of the parties, often specifically including acts of God, strikes, government actions, etc. Many such clauses, however, do not excuse payment obligations. Not all leases contain a force majeure clause, and a recent court case in Maryland suggests that when a commercial lease does not contain an express force majeure clause, performance will not be excused even if such an event occurs. In this situation, however, common law doctrines such as impossibility or frustration of purpose may provide some relief. It should be noted that Maryland courts construe a force majeure clause narrowly, and unless the lease specifically excuses the obligation of a tenant to pay rent when due, the obligation is not excused. Similarly, impossibility or frustration of purpose are difficult to prove in most cases. However, this does not limit the parties’ ability to be flexible under the lease, inasmuch as leases are often the basis for long-term relationships.
- Damage, destruction, and other casualty. These clauses address the obligations of the parties in the event of damage or destruction by fire or other casualty. Some clauses could be broad enough to apply to cover the presence of COVID-19.
- Quiet enjoyment. Often a lease will contain a covenant by the landlord that the tenant’s use of the premises will not be disturbed provided that the tenant has complied with its lease obligations. Under the right circumstances, it could be argued that building closures or restrictions may constitute a breach of this covenant.
- Hazardous substances. Most often these clauses apply only to the tenant, but occasionally a lease will impose an obligation on the landlord to comply with all applicable environmental laws and to indemnify the tenant from any hazardous substances that were not introduced by the tenant. Again, some clauses could be broad enough to cover the presence of COVID-19.
- Continuous use. These clauses are most often found in retail leases (retail stores, restaurants, etc.) and specify certain required hours of operation. A tenant’s partial or complete closure may constitute a breach of the lease, but such breach may be excused under one of the items listed above.
The current circumstances strongly suggest that the parties should resolve matters amicably and avoid disputes. In normal times, parties sometimes turn to the courts to resolve disagreements over lease obligations. In Maryland, however, judicial access is currently very limited and courts are prioritizing certain specified emergency matters. Moreover, on April 3, 2020, Gov. Hogan took the unusual step of extending the moratorium on residential evictions to include commercial evictions. Additionally, commercial landlords risk engendering substantial ill will by taking a hard line position, and most have shown that they are open to a restructuring of the lease obligations. Likewise, the prudent tenant will take the lead in offering a creative solution to its landlord. Both parties are well advised to keep open the channels of communication, discuss the issues, and reach an agreement. It is now more important than normal to document any restructuring or amendment of the lease in writing. This will prevent misunderstandings and litigation when things ultimately return to some semblance of normality.
Possible Insurance Coverage
Possible insurance coverages available to both commercial landlords and tenants include:
- Business interruption coverage, which is available under many commercial property policies, usually requires physical loss or damage. Insurers often deny a business interruption claim related to COVID-19 on the ground that there was no physical loss or damage. However, some courts have found that the presence of a contagion such as COVID-19 may constitute insured physical loss or damage and therefore may trigger business interruption coverage. While there is no controlling case law in Maryland, this can provide an argument against denial of coverage.
- Many property policies also provide “civil authority” coverage, which generally covers losses when governmental authorities prohibit or restrict access to the insured property because of damage to it or other property in the area. Insurers have attempted to deny civil authority claims related to COVID-19 on the ground that stay-at-home orders are focused on people and not property. However, it could be argued that Maryland’s stay-at-home order applies to many businesses, and the impact is to take away the use of the insured building, thus triggering civil authority coverage.
- Insurers have denied COVID-19 claims on the ground that the policy expressly excludes viruses under “standard form” exclusions. Often, however, a close examination of the policy language shows that the insurer’s claim of exclusion turns out not to exclude coverage at all.
- Property policies may also provide other coverages which may be available. Examples include specifically added coverages or industry-specific coverages.
These insurance issues undercut an insurance company’s claim that COVID-19 losses are not covered. A close examination of the insurance policy itself, as well as the facts and circumstances of each particular claim, is crucial to determine whether coverage is available.
Engaging the assistance of counsel is strongly advised to navigate these important issues. The attorneys at T&L are ready to assist you in reviewing your leasing and insurance concerns. We have decades of experience in both lease restructurings and insurance coverage issues. Please contact us if you have any questions on these matters.