As a result of the COVID-19 pandemic, Dr. Amy Acton, Director of the Ohio Department of Health, issued a Stay at Home Order on March 22, 2020 (and amended on April 2, 2020) that resulted in all businesses in the State of Ohio being closed other than essential businesses and operations. This followed an Order on March 15, 2020, closing all Ohio bars and restaurants to in-house patrons. These Orders resulted in the closure of most retail businesses, other than those involved in essential businesses which include sales of food and beverages, pharmacies, gas stations, computer sales and firearm sales among other things.
The Orders had an immediate economic effect on landlords and tenants under nonessential retail leases. Tenants are unable to make rent payments without income, and landlords may be unable to make mortgage loan payments as a result.
Landlords and tenants have differing views of who bears the risk of a tenant’s inability to pay rent due to the pandemic and/or the Orders.
Here are some of the legal considerations involved:
- Many leases have force majeure provisions, which excuse performance under the lease by landlord or tenant when the inability to perform is caused by events beyond their control. The pandemic and the Orders may qualify as events beyond a party’s control under many typical force majeure events listed in leases:
- National emergency: A national emergency was declared on March 13, 2020.
- Governmental restrictions, orders or regulations
- Acts of God – this is generally interpreted as weather-related events
- Catch-all language such as “other causes beyond the reasonable control of the party obligated to perform”
Few if any leases specify a pandemic as a force majeure event (although we have seen one force majeure provision that includes an epidemic), but tenants will certainly ask for this in the future.
Unfortunately for most tenants, force majeure provisions in leases typically state that the tenant’s obligation to pay rent is not excused even if these events occur. As a result, the force majeure provision may excuse the landlord’s obligation to make the leased premises available to the tenant but require the tenant to continue to pay rent. If you are the fortunate tenant whose lease has a force majeure provision that does not make an exception for the payment of rent, the Orders should qualify as a force majeure event based upon governmental restrictions, orders or regulations or under the catch-all language.
- The legal doctrines of “frustration of purpose” and/or “impossibility of performance” may apply as defenses to payment of rent. Frustration of purpose occurs where after a contract is made, a party’s principal purpose is substantially frustrated without his/her fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contact was made. Arguably, the occurrence of a pandemic which resulted in the closure of the tenant’s business at the leased premises without his/her fault should qualify as an event which frustrates the tenant’s purpose in entering into the lease. However, frustration of purpose is not widely accepted by Ohio courts as a basis for relieving a party from its obligations under a contract, particularly if the non-occurrence of an event (i.e., a pandemic) was not a “basic assumption on which the contact was made.”
- A tenant may assert that the right to not pay rent arises because the tenant no longer has a space to operate its business. Rent is paid for the use of the leased premises. Leases contain provisions for nonpayment of rent following a fire or condemnation when the tenant cannot operate its business. If the tenant cannot use the leased premises, the risk of loss may be on the landlord.
- A
tenant may cite Governor DeWine’s April 1, 2020 Executive Order that:
- Requested Landlords to suspend for at least 90 days rent payments for small business commercial tenants in Ohio that are facing financial hardship due to the pandemic;
- Requested Landlords to provide for a moratorium on evictions of small business commercial tenants that are facing financial hardship due to the pandemic for at least 90 days;
- Requested Lenders to provide commercial real estate borrowers with a commercial mortgage loan for Ohio property an opportunity for a 90-day forbearance term.
While governors’ Executive Orders carry the weight and enforcement power of law, note that the Governor’s Order is phrased as a “request” to Landords and Lenders.
Similarly, impossibility of performance excuses a party from a contract where performance of the contract becomes impossible due to an event which was unforeseen. The pandemic and the Orders were likely unforeseen by a tenant entering into a lease (although there are numerous commentators stating that a pandemic was foreseeable) and made the performance of the lease impossible because the tenant cannot operate at the leased premises. Ohio courts have previously granted relief from performance of a contract if the impossibility was caused by a change in laws or order of a court which prevented performance such as performance of a lease for a tavern in a township which was subsequently voted dry.
Given the difficulty in determining if there is a legal ground upon which a tenant may stop paying rent at this time, landlords and tenants will be attempting to negotiate the terms for rent relief on a case by case basis. In light of voluminous requests for deferral or abatement of rent during this period, many landlords are agreeing to defer rent payments on a case by case basis, on terms such as payment of past due rent over a period of months or at the end of the lease. However, the landlord may ask for something in return.
If you are a landlord or tenant seeking assistance dealing with rent relief requests, we would be happy to speak with you. Fern Goldman may be reached at fegoldman@woodlamping.com.
