As of today, by virtue of Governor Cuomo’s executive orders related to the COVID-19 pandemic, most of New York’s businesses are physically closed. On March 16th, the Governor also imposed a 90-day moratorium on evictions. Despite both of these facts, commercial tenants have not been relieved of their obligation to pay rent.
A host of issues for both landlords and tenants has resulted from theses circumstances, including:
- For tenants: what defenses will a tenant have regarding its failure to pay rent once the moratorium on evictions is lifted? Will any of the unpaid rent be waived by the landlord and/or the State of New York through changes in the law?
- For landlords: can a commercial landlord take certain actions now, while the moratorium is in place, such as serving notices of default or statutory rent demands?
- For both parties: what analysis should be made now to prepare for future litigation or to determine whether negotiation is a better alternative?
This post will examine these questions in light of new laws, proposed legislation and existing legal principles.
The CARES Act
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed by President Trump on March 27, 2020. It imposes certain restrictions on landlords who have federally insured mortgages (e.g., Fannie Mae, Freddie Mac, FHA, HUD, VA) or are renting properties participating in a covered housing program, such as the Section 8 voucher program, rural housing voucher program, Low-Income Housing Tax Credit and properties covered by the Violence Against Women Act. Among other things, the CARES Act imposes a 120-day moratorium on evictions by these landlords based upon non-payment of rent, and prohibits these landlords from charging fees, penalties or other charges to a tenant related to the non-payment of rent.
The CARES Act also imposes a moratorium upon any covered landlord or owner of a property which prohibits them from serving or sending eviction notices, notices to vacate, and rent demands. This includes New York Real Property Law 14-day rent demands, but it appears that it does not to apply to five-day rent notices.
Executive Order 202.8
Governor Cuomo’s Executive Order No. 202.8, dated March 20, 2020, provides that, beginning on March 22, 2020 at 8 p.m., “there shall be no enforcement of either an eviction of any tenant residential or commercial, or a foreclosure of any residential or commercial property for a period of ninety days.” This Order does not include a moratorium on service of any predicate notices, default notices or demands. Therefore, these notices may be served during this time. Additionally, “essential” filings, such as landlord lockouts, serious house code violations, and repair orders can still proceed before the courts.
Although landlords are still entitled to serve predicate demand notices, it is unclear how Courts will treat notices served when businesses are closed and employers/owners are unable to work from the business premises. In particular, it is not clear that Courts will uphold service of a 14-day statutory notice, which must be served at the premises, when a tenant/owner’s business is temporarily closed. In these cases, the tenant/owner may not even know that a notice has been posted on its premises, or have access to the mailings that were required to be served. It is, therefore, a possibility that a Court may deem it unjust to determine that a tenant failed to comply with such a demand without proof that the tenant or its agents actually saw the notice and/or obtained the mail. In such an event, summary proceedings based upon these predicate notices might be dismissed and landlords may be required to re-serve the notices, thereby delaying the entire eviction process.
Conversely, a Court might favor the landlord, since Executive Order 202.8 does not prohibit service of notices during this moratorium period, and a commercial tenant would surely know that it had intentionally failed to pay rent despite being obligated to do so. Thus, a Court might rule for a good faith landlord that continued to pay taxes and expenses on the building and expended costs for the notice, while the tenant purposefully refused to pay rent.
Even in these circumstances, a court might consider whether the tenant continued to profit and operate its business, albeit not in the physical leasehold premises. That could be determined in discovery, and could favor a landlord if a tenant purposefully failed to pay rent despite having the means to do so.
These and other issues are simply unknown at this point.
New York Senate Bill S8125
Senate Bill S8125 is currently in committee in the New York State Senate and has not yet been signed by the Governor. If enacted, it would forgive rent payments and certain mortgage payments for 90 days for certain residential tenants and small business commercial tenants.
After the Moratorium, Lease Terms Will Be Key
Once the stay of evictions and other landlord/tenant proceedings and leasehold actions has been lifted, many tenants and landlords will need to address months of non-payment. Landlords will need to consider what action to take. Tenants will need to consider which defenses can be asserted. And, both parties will need to decide whether litigation is the best business decision under the circumstances. Therefore, now is the time for both landlords and tenants to analyze their leases and to evaluate the alternative of negotiating an immediate settlement.
Landlords may find leverage in the fact that they are still entitled to serve default notices, and even termination notices. They might use this to negotiate rent reductions, waivers, or early lease terminations.
Landlords and tenants should also review whether guarantees exist. Defenses that might be available to tenants under the lease, such as force majeure, frustration or impracticability/impossibility of purpose, may not be available to the guarantor, who could remain fully liable. This might give landlords additional leverage, and could lead the parties to negotiate over rent reductions, waivers, and the use of security deposits, which the tenant could agree to replenish after the lifting of the moratorium.
Force Majeure Clauses
A defense of force majeure excuses a party’s performance based on extraordinary events, if an agreement so provides. Each lease will have different provisions that may excuse a tenant’s performance based on events outside of a tenant’s control. Some clauses may identify specific unanticipated events, such as: war, strikes, labor disputes, acts of God, judicial orders, riot, fire, terrorist acts (commonly included in leases since 9/11) or other acts beyond the reasonable control of the party. Most provisions will not include “pandemics” or “causes related to an illness or disease”. Instead, the broadest language is likely to be the most successful defense relating to the current situation, such as “forces beyond the tenant’s reasonable control.”
Even where a force majeure provision enumerates an unforeseen circumstance that might apply, tenants must examine whether there are carve-outs. Many leases expressly exclude the payment of rent from the obligations of which the tenant may be relieved under a force majeure clause.
Ultimately, how courts will interpret force majeure clauses in the COVID-19 context is still unknown. In prior case law involving the use of force majeure clauses, most tenants have been unsuccessful.
Compliance with Laws Provisions
Many leases contain catchall provisions stating that “both parties agree to comply with all provisions of the law.” These clauses may provide a better defense for a tenant, who might argue that its business was closed and it was unable to pay rent because it was complying with governmental regulations, orders or laws. Again, it is unknown whether this provision would be a viable defense to non-payment of rent.
Common Law Defenses
A common law defense that a tenant may use, and that landlords should take note of, is impracticability or impossibility of performance resulting from the COVID-19 pandemic and governmental stay-at-home orders.
Landlords may argue that a tenant’s business continues to exist, and even thrive, even though its physical premises has been closed (i.e., doing business via a website, from a remote/home location), thereby not making performance “impossible”.
Similarly, the doctrine of frustration of purpose applies when both parties to a contract can perform under it, but their mutually expected performance, that is, the very purpose of the commercial lease, is made impossible or impracticable (i.e., the “use” clause is for a particular business, and the tenant’s customers no longer exist, its contracts are cancelled, etc.).
Again, on the landlord side, it could be argued that the main purpose of the lease–the tenant’s business–continues, albeit not in the physical premises. The tenant still may have the ability to earn revenue and pay rent, regardless of whether it cannot access its physical premises.
With so much uncertainty, it may be prudent for both parties to negotiate an early settlement. It is unknown how tenants will fare in asserting these or other defenses in light of the COVID-19 pandemic. Landlords may be left with vacant buildings or with new tenants willing to pay rental amounts that are significantly below what could have been negotiated with prior tenants. Additionally, there is likely to be a flood of litigation once the moratorium is over, and attendant delays in the court system. There is also a growing view that Courts may attempt to balance the need to keep tenant businesses in place with the needs of landlords who have continuing obligations to pay taxes and other costs of maintaining their buildings. Given the broad spectrum of possible outcomes, many landlords and tenants will be better suited to reach an agreement between themselves.
It is impossible for a landlord or tenant to know precisely how any non-payment litigation will be determined once the eviction moratorium is lifted. The only way to achieve a certain outcome is through negotiation and settlement. Given that no new proceedings can be commenced through June, landlords and tenants should use the coming weeks to analyze their leases, consult with counsel and open a dialogue with one another.
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