COVID- 19 and its Possible Effects on Commercial Leases

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On March 22, 2020, Governor John Bel Edwards issued a proclamation mandating that certain businesses deemed non-essential cease operation. These restrictions have forced many businesses to temporarily close since they cannot access their premises. Those businesses are undoubtedly looking to cut expenses in order to survive the uncertain times. One of the largest expenses for businesses is rent. While many businesses are forced to require their employees to work from home, the need for rental space is an unnecessary expense. For those business owners that can’t open their business because of the government restrictions, the questions is now posed, how does COVID-19 effect my commercial lease?

Leases and Common Legal Terms

It is important to understand a few legal terms in regards to commercial leases. A Louisiana lease is a contract whereby a lessor gives a lessee the right to use a thing for a limited duration in exchange for the lessee’s payment of rent. The lessee is entitled to the peaceful possession of those premises during the duration of the lease. However, COVID-19 has made it difficult for both parties to perform their obligations and many lessees are struggling to pay rent due to the government’s stay-at-home orders.

If COVID-19 issues begin to arise between a lessor and lessee, both parties would do well to review the terms of their lease, specifically provisions regarding Force Majeure and Early Termination.

Force Majeure clauses typically excuse performance of an obligation if performance of the obligation is prevented by an “Act of God” or other circumstances out of a party’s control such as a natural disaster, or in this case, a global pandemic. As previously discussed in our blog Louisiana Contracts and COVID-19 (Coronavirus): Is Force Majeure Applicable?, whether or not a force majeure provision applies depends on the specific language present.

In addition, some commercial leases contain early termination clauses that give either or both parties the right to terminate the lease before the end of the term under certain circumstances. Similar to Force Majeure clauses, the contract language controls the parties’ rights and remedies.

Louisiana Law

No matter how sophisticated the parties or the lease, it’s generally impossible to cover every imaginable situation that may arise which could affect the parties. When the lease terms are silent as to certain conditions, the Louisiana Civil Code articles apply. For example, Louisiana Civil Code article 2682 provides that the lessor (landlord) is bound to deliver the thing, to maintain the leased premises in a condition suitable for the purpose of which it was leased, and to protect the lessee’s peaceful possession for the duration of the lease.

In addition, Louisiana Civil Code article 2715 provides that when a lessee’s use of a leased premises is substantially impaired without fault of the lessee, the lessee may be able obtain a reduction in rent or even a termination of the lease. Thus, tenants may have an argument that, because of the COVID-19 shutdown, they may be entitled to a termination of his commercial lease.

Pertinent Louisiana Case Law

The issue whether commercial spaces becoming impossible or impracticable to be occupied is unfortunately no stranger to Louisiana. After Hurricane Katrina, many commercial lessees sought out termination of leases or reduction for rent. For example, in Meadowcrest Professional Bldg. Partnership v. Toursarkissian, the Louisiana Fifth Circuit held that a negative business climate caused by a force majeure event (i.e. Hurricane Katrina) was not the type of event to which Louisiana Civil Code article 2715 applies. Thus, the tenant was required to honor the lease terms.

In another case, 727 Toulouse, LLC v. Bistro at the Maison De Ville, LLC, a landlord removed HVAC equipment leading to loss of air conditioning for a commercial property. The tenant did not pay rent the next month due to this deficiency. In response, the landlord attempted to terminate the lease due to the tenant’s default in payment. The Court held that refusing to pay rent while and refusing to vacate the premises is an improper self-help remedy which Courts cannot allow.

In 2019, in the case of Tales IP, LLC v. Common-Camp, LLC, a tenant withheld rent from a landlord who failed to make necessary repairs to the premises. The tenant actually initiated litigation by depositing the unpaid rent in the registry of the Court. The Court held that because cancellation of a lease is not favored in Louisiana, courts are vested with discretion under certain circumstances to decline to grant a lessee cancellation although such right appears to be available to him.

In conclusion, there is one clear consistency in the law. While each case depends on its unique set of circumstances and contract language involved, withholding rent and refusing to vacate the premises is not a recognized legal remedy for an aggrieved lessee. However, what is not clear is whether a lessee can invoke Louisiana Civil Code Article 2715 to be provided relief due to COVID-19. The revision comments to Louisiana Civil Code Article 2715 provide certain examples of impairments allowing for dissolution of a lease. One such example is a “governmental regulation that results in or imposes substantial restrictions on the use of the leased thing.” As these examples indicate, the circumstances contemplated by article 2517 must not be attributable to the fault of the lessor.

Accordingly, the restrictions imposed by the Governor’s stay-at-home could be classified as “circumstances external to the leased thing,” thereby limiting the lessee’s remedy to dissolution and not a diminution of the rent.

Should you have any questions or you would like to discuss this issue in further detail, please do not hesitate to contact us to schedule a free consultation.

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