This is the first of a 4-part series being presented by Murphy Schiller & Wilkes LLP. In Part 1, Matthew J. Schiller, Esq. answers questions related to assisting clients through real estate and business challenges associated with the COVID-19 crisis. As a partner at Murphy Schiller & Wilkes LLP (MSW), Matthew represents clients in a wide range of transactional and litigation matters throughout New Jersey, New York, Connecticut, and elsewhere throughout the country.

Q1: Can a tenant’s performance obligations under a lease be forgiven as a result of the COVID-19 pandemic?

A1: Most likely not, but it will depend on the terms and conditions of the lease. The COVID-19 pandemic will significantly impact many tenants’ ability to perform certain obligations under their leases, including the ability to timely pay rent (due to economic hardships), maintain their premises (due to governmental closures and lack of available third-party service providers), and timely complete fit-outs and other alterations (due to supply chain disruptions and inability to obtain necessary permits from local authorities). During these trying times, it is critical to remember that every commercial lease and/or contract is a stand alone document governed by its express terms. Accordingly, there is no “one size fits all” solution to particular performance issues under commercial leases and each document needs to be carefully reviewed to determine (1) if the lease expressly addresses the particular issue, and (2) if not, how broadly (or narrowly) can particular provisions be construed to govern non-compliance challenges resulting from this pandemic.

The most applicable provision in many leases is the “force majeure” clause, which is intended to address the parties’ rights and liabilities (or lack thereof) in situations where “unavoidable delays” outside of a party’s control will delay performance. It is critical to remember that force majeure provisions are generally intended to “toll” performance of certain lease obligations on a day-for-day basis for so long as the source of the applicable delay continues in order to avoid a default under the lease; however, these provisions generally do not simply “forgive” non-performance. Once a party is able to perform under the Lease, it must promptly do so. Moreover, most force majeure provisions do not apply to economic hardships. Thus, unless a tenant’s actual ability to pay rent is made impossible due to a particular condition (e.g., all applicable banking institutions are closed and not permitting withdrawals or honoring deposits), the payment of rent would not be tolled pursuant to a force majeure clause.

Prior to the COVID-19 pandemic, force majeure provisions have been narrowly construed by courts. Accordingly, if a force majeure provision does not expressly reference pandemics, epidemics or the like or is otherwise insufficiently broad, it may not be applicable to delays resulting from the COVID-19 outbreak. However, recent closures required due to government actions in response to the virus (e.g., Governor Murphy’s recent executive orders) may be an alternative basis to apply force majeure under a lease. In instances where a force majeure clause does not incorporate any applicable scenario or the lease fails to include a force majeure provision, a tenant would have to rely on equitable concepts such as “impossibility” or “frustration of purpose” to temporarily excuse non-performance.

In summary, unless a lease provision expressly provides to the contrary, it is highly unlikely that a lease (or court) will “forgive” non-performance of obligations; however, certain obligations may be tolled if the lease expressly permits. MSW attorneys can help both landlords and tenants evaluate specific lease provisions to confirm their lease obligations, rights and liabilities.

Q2: Are landlords in New Jersey required to forbear or forgive the payment of rent from commercial tenants due to recent governmental actions pertaining to the outbreak of COVID-19?

A2: No. Although the majority of Governor Murphy’s recent Executive Orders pertaining to the COVID-19 pandemic will have various impacts on the real estate industry, no governmental actions to date require commercial landlords to forbear or forgive any rent payments due from commercial tenants.

Executive Order 106 temporarily prevents the removal of lessees, tenants, homeowners or any other occupants from eviction actions and/or foreclosure proceedings; however, it only applies to residential properties (i.e., any property rented or owned for residential purposes, including, houses, buildings, mobile homes, but excluding hotels, motels, or other guest houses, and residential health care facilities). Moreover, although Executive Order 106 temporarily prohibits the displacement of individuals from their residences, it expressly does not affect any schedule of rent that is due. Accordingly, although apartment operators are significantly impacted by Executive Order 106, the payment of rent by residential tenants is not forgiven. Further, Executive Order 106 is completely inapplicable to owners of other commercial properties such as shopping centers, office buildings and industrial parks, who may continue pursuing eviction actions against commercial tenants for the non-payment of rent (subject to court closures and scheduling limitations resulting from COVID-19).

Executive Order 107 imposes widespread restrictions on the operation of businesses in New Jersey for the duration of the COVID-19 pandemic. Specifically, Executor Order 107 requires that New Jersey residents remain in their residences except in limited circumstances, including, obtaining goods and services from “essential” retail businesses. Essential retail businesses currently include grocery stores, pharmacies, alternative treatment centers, medical supply stores, retail functions of gas stations, convenience stores, hardware/home improvement stores, banks/financial institutions (retail only), laundromats/dry cleaners, stores that sell supplies for children under 5 years old, pet stores, liquor stores, car dealership (but only to provide auto maintenance and repair services), and auto mechanics, mail and delivery stores (retail only), mobile phone and repair shops, bicycle shops, but only service/repairs, livestock feed stores, nurseries and garden centers, and farming equipment stores, child care centers (only for essential workers), realtors (but only to show houses 1-on-1), firearm retailers (by appointment only during limited hours) and microbreweries and brewpubs (for home delivery only). All other brick-and-mortar premises of non-essential retail businesses and recreational and entertainment businesses have been ordered to temporarily close. Although Executive 107 allows non-retail businesses to stay open, it requires that businesses accommodate their workforce, wherever practicable, for telework or work-from-home arrangements.

Based upon the foregoing, the public’s ability to purchase goods and partake in commerce with many businesses will be significantly curtailed for a potentially extensive period of time. Notwithstanding such restrictions, Executive Order 107 provides no express economic relief for commercial tenants from paying rent to landlords if their business is closed as a “non-essential retail business” or its employees are temporarily not utilizing the building because they are staying/working from their homes.

Governor Murphy’s Executive Orders will significantly impact many tenants’ businesses and their ability to operate at their premises, however, no official actions have been taken to date that would forgive or permit late payments of any rent obligations by commercial tenants. Accordingly, unless a commercial lease expressly provides to the contrary, commercial landlords have no obligation under New Jersey law to forbear or forgive rent payments due from commercial tenants. MSW attorneys can assist landlords evaluate their available rights and remedies under their respective leases, at law or in equity, should a tenant fail to timely pay rent in accordance with its lease.

Q3: What options do landlords and tenants have if a default is anticipated or occurs due directly (or indirectly) to the COVID-19 pandemic?

A3: At this time, it is recommended that both landlords and tenants act and negotiate in good faith to resolve potential lease issues that arise due to the COVID-19 pandemic. Notwithstanding the express obligations, rights and remedies available under a lease, most commercial leases were not drafted in a manner that contemplates the extended closure of businesses and government services as a result of a pandemic such as COVID-19. Moreover, existing case law establishing precedent for available equitable relief for contractual and leasing disputes is extremely limited and unpredictable given the current unique factual circumstances confronting society. Accordingly, there may be significant ambiguities and unknowns under the lease, at law, and in equity, that prevent parties from fully evaluating the applicability of their rights and remedies should a lease dispute arise.

It is clear that there will be extensive economic impacts on the real estate industry as a result of the (temporary and permanent) closures of many commercial businesses due to the stay-at-home and other quarantine policies instituted by federal, state and local governmental authorities. As a result, landlords should be mindful of the tremendous revenue strains and other performance limitations currently impacting most commercial tenants at this time. Tenants must also be cognizant of their landlord’s significant ongoing obligations, including mortgage payments, property taxes and other maintenance costs and obligations with respect to their properties, which have not been relaxed by any federal, state or local governmental actions to date.

Therefore, in most instances, it would be advisable for landlords and tenants to proactively address (individually and/or collaboratively) the various leasing issues that may arise in connection with their respective tenancies. Landlords should prepare a global strategy towards dealing with its tenancies, all while being cognizant that each tenancy may experience unique circumstances. For example, a grocery store or pharmacy is currently experiencing very different economic conditions as a result of this pandemic than a closed furniture store. Similarly, tenants should proactively address any anticipated rent or other lease performance concerns in order to avoid potential default scenarios under their leases. If requesting a rent concession from its landlord, a tenant should be prepared to demonstrate that they are contemporaneously applying for applicable state and federal financing/loan programs, to the extent available.

Numerous forbearance strategies and structures exist that would enable a tenant to temporarily reduce its financial obligations during the pandemic on economic terms acceptable to the landlord. The attorneys at MSW are available to discuss potential structures and remedies available to temporarily restructure the parties’ financial obligations under the lease, including, but not limited to, the use of security deposits (subject to replenishment) to ensure that tenancies and building operations can continue in an uninterrupted manner throughout this crisis.

Q4: Which Federal and State financing/loan programs are your business and real estate clients most interested in applying for?

A4: While there are numerous Federal and State financing/loan programs related to helping businesses withstand this crisis, there are two programs that seem to be most advantageous to our clients.

The first is the Paycheck Protection Program (PPP), a federally guaranteed loan program created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was recently passed by Congress. Administered by the Small Business Administration (SBA), this program will help employers maintain their payrolls during this crisis. If employers maintain their workforce, up to eight (8) weeks of payroll costs can be forgiven. The loan can be used for payroll costs, costs related to health care benefits, payments of interest on any mortgage obligation, rent, utilities, and interest on any debt obligations incurred before the covered period.

The second program is the Small Business Emergency Assistance Loan Program, a state-level program being administered by the New Jersey Economic Development Authority (NJEDA). This program will provide working capital loans of up to $100,000 to businesses with less than $5 million in revenue. Loans made through this program will have a ten-year term with zero percent interest for the first five years. Thereafter, the loan resets to the NJEDA’s prevailing floor rate (capped at 3.00%) for the remainder of the term.

Q5: How can the attorneys at MSW assist clients through this crisis?

A5: With the right assistance, we believe that our clients will get through these uncertain times. There is no denying that there is going to be some pain, but we are here to help. Whether a client is interested in seeking advice on renegotiating the terms of their lease or loan, or they would like to learn more about applying for financial assistance, the attorneys at MSW are available to assist. Now is a time for community. We will all get through this together.