When God Acts: Rental Obligations During COVID-19

by Kevin Stidham

When government orders, unique circumstances and/or acts of God hinder your ability to use your leased property, does your nonprofit still have the contractual duty to pay rent?

Bottom Line:

·      Most lease agreements have sections specifically addressing the parties’ obligations when extraordinary circumstances impact the terms of the lease.

·      Whether your lease will release your organization from paying rent due to shelter-in-place orders or other aspects of the pandemic depends on the specific language of the lease and the specific laws of your state.

·      Even if relief from rent payment is not available, federal and state financial assistance programs may help the organization find solutions to their financial pressure.

·      After understanding the organization’s legal rights and speaking with an attorney, the organization can also consider discussing payment options and adjustments directly with the landlord to see if a mutually beneficial solution is available.

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Shelter-in-place orders and similar pandemic response efforts have many employees on leave or working from home while employers continue to pay high rent expenses for spaces their teams cannot legally use or occupy. When extraordinary circumstances such as these prevent a tenant from using their rented space, must the tenants continue to pay the rent bill?

The answer is: it depends. Duty to pay, or release from your duty to pay, depends on laws of the state and the language of the organization’s contract with the landlord, known as a “lease agreement” or simply “lease.”

 Nonprofits struggling with rent during this crisis can consider the following initial steps as they evaluate options for their organization.

1) Review your Lease Agreement

In legal terms, a lease involves an exchange of obligations between two parties, a renter, or tenant, and a property owner or manager, the landlord. The tenant’s obligations under the lease require the tenant to pay rent, not use the property in a restricted way, etc. In exchange, the lease binds the landlord to allow the tenant to use his or her property. If the tenant cannot use the rented space, the question of whether the tenant must continue pay the rent bill often depends on whether the tenant’s inability to use the facility is because the land lord is not performing his or her contractual duty.

Most leases include special sections explaining the obligations of the landlord and tenant if extraordinary circumstances impact the exchange described in the agreement. These sections come under various names – three of the most common are “Force Majeure,” “Act of God,” and “Landlord’s Inability to Perform.” For simplicity, we will use the term “force majeure” to refer collectively to these types of clauses.  

In any case, with COVID-19 related closures, the landlord’s own actions are likely not the cause of the tenant’s inability to use the leased facility. Generally, states and localities have put in place emergency orders which drastically restrict normal activities. In short, a “force majeure” has made it impossible for the landlord to perform his or her side of the bargain. To evaluate what the tenant’s options are, the tenant and his or her attorney should review the lease to see what the parties’ rights are in the event of a “force majeure.” 

Some leases may state that the parties are released from their obligations in the event of a force majeure. However, in many commercial leases, “Force Majeure” or like provisions state that the tenant’s duty to pay rent remains unchanged, even in circumstances where a “force majeure” makes it impossible for the landlord to perform his or her obligations to allow a tenant to use the leased facility.[i]

Where this language is present, the tenant likely will still owe rent, according to the lease agreement, even though the tenant is unable to use the facility due toCOVID-19 restrictions. This does not mean that no relief from rent expenses is available, however. Federal and local programs may help the organization get through this time of economic pressure.

2) Consider Available Emergency Aid

 To quote Paradise Lost, “What though the field be lost? All is not lost.” As you may know, COVID-19 has caused economic hardship for a vast array of Americans and American businesses. Because of this, Congress has made an unprecedented amount of federal aid available for small businesses. In the recently passed CARES Act, paying “rent (including rent under a lease agreement)” is specified as one of the covered uses for PPP funds.[ii]  Moreover, a portion of loan funds used during the first eight weeks after the loan is issued  to pay rent may qualify for loan forgiveness.[iii] However there are a number of requirements under the PPP loan program that will impact loan forgiveness. For more on PPP and the other aid options offered during this crisis, please see this NLI analysis.

Many religious nonprofit organizations are be eligible for one of the types of federal aid being offered. However, religious nonprofits should still be careful before accepting aid from the government: as noted in our “Known Unknowns” post, government funds often comes with strings attached and these strings could restrict your religious liberty.   

3) Have an Initial Conversation with Legal Counsel

If your organization is struggling to make rent payments and needs assistance in determining next steps, you can speak with legal counsel about the organization’s options under the lease agreement.  

An attorney will be able to help you review the force majeure clause in your lease to determine whether the organization has a continuing duty to pay rent. An attorney can also assist in determining whether relief is available under state law. In some state, even if a lease appears to indicate that the tenant must to pay rent no matter what, state law may prevent the landlord from enforcing this term. For example, New York’s rule is that a Force Majeure clause in a lease must specify the event that the landlord is using to excuse their nonperformance.[iv] This would seem to require a lease to specifically mention “pandemics”, but the question has not yet been decided in court. A local attorney will know relevant limitations your state places on the enforcement of force majeure provisions in commercial leases under these circumstances.  

An attorney can also help your leaders understand the consequence and risks of failing to pay rent. The CARES Act offered a moratorium on evictions under residential leases; it did not extend this moratorium to commercial leases.[v]  However, some states and localities have stepped in to aid rent obligations owed under commercial leases. To give just one example, Kentucky’s Supreme Court issued an order postponing all evictions for commercial leases.[vi] If your organization truly cannot find away to pay rent, the organization may have some temporary legal protections which will give the organization time to seek a long-term solution.

4) Weigh the Costs and Benefits

Simply choosing not to pay rent without negotiating with your organization’s landlord has many drawbacks. Even if you believe that your organization is not obligated to pay rent due to the consequences of the pandemic, if the landlord takes a position, both parties might end up in court. Litigation is costly. It will almost certainly cost the organization more to pursue litigation than it would to pay rent. Moreover, going to court over  a current lease agreement or alienating your landlord may pose important costs for a religious nonprofit to consider. Before you act, it is highly advisable to consult with an attorney and perform a cost benefit analysis of all options. These are unprecedented and unpredictable times. One can never go wrong by asking God for the virtue of prudence during a time of discernment.

5) Talk with Your Landlord

In the end, an organization in need of rent relief may be best served by reviewing the lease agreement, consulting with an attorney, outlining key points for discussion, and communicating the issues directly to the landlord. The landlord is under financial pressure as well. The landlord is also looking toward an uncertain economic future and may not want to alienate any loyal tenants. Given these considerations, the landlord may be willing to renegotiate the terms of rent or the timing of payments. Perhaps your landlord will not agree to reduced rent during this time of crisis; but maybe open to a payment plan, allowing you to pay current rental obligations overtime (once you are able to get back to business).  

Although an amicable solution is desirable, you should understand your legal rights as thoroughly as possible before talking to your landlord by reviewing your lease agreement and talking to an attorney. Being well informed will protect you against a malevolent landlord. If nothing else, you are not alone right now.  Many are struggling and much is being done to ease that struggling.  

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[i] To add a layer of complexity, state law may also address the question of when a “force majeure” has occurred and, if so, what the parties’ obligations under the contract will be.

[ii] CARES § 1102(a)(2)(F)(i)(V).

[iii] CARES § 1106(a)(4), (b)(3).

[iv] Phibro Energy, Inc. v.Empresa De Polimeros De Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989) (citing Kel Kim, 524 N.Y.S.2d at 385).

[v] See generally,CARES § 4024: “Temporary moratorium on eviction filings.”

[vi] Order 2020-08

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Kevin Stidham is a third-year law student at Cornell Law School.  Growing up in Orange County, California, Kevin was inculcated in the faith through the Catholic education offered at St. Anne School and JSerra Catholic High School.  As an undergraduate, Kevin attended the University of Notre Dame where he studied the Great Books while majoring in the Program of Liberal Studies.  While at Cornell Law School, Kevin focused on transactional courses with a particular focus in tax courses.  During his first summer of law school, he participated in the Blackstone Fellowship by interning under John Peiffer at the founding of NLI. He has also interned for The Busch Firm and plans to practice law in California after law school graduation.