Relating to Real Estate
Reflections of a Homebound Real Estate Lawyer: All Dressed Up and Hesitant About Where to Go
Two months ago, we could have used the classic idiom “All dressed up and no place to go” as the title for this article. In the immediate aftermath of our collective national appreciation of the dangers of COVID-19 and the need to take extraordinary and unprecedented actions to at least mitigate this danger and protect our health and safety, that was the reality. Whether it was weddings, graduations, concerts, NASCAR races, NBA basketball, Opening Day or conferences, conventions, shopping centers, restaurants or offices, nobody was going anywhere, dressed up or not.
The Real Estate group, along with all of our Gordon Feinblatt colleagues, dressed down and stayed home to work remotely. Not only was our attire different, we quickly pivoted from our clients’ usual routine issues to new ones arising directly from the crisis: How can we qualify for loan forgiveness under the Paycheck Protection Program? How do I legally furlough my employees? Is now the time to focus on my estate planning? Do I need a special license to allow carry-out cocktail service to my loyal customers?
In our Real Estate group, the questions came fast and furious. Can my landlord evict me? Do I have to pay April rent? If I want to give my tenant a rent deferment, do I have to get my lender to approve? Can I foreclose on my deadbeat borrower who is always late with his mortgage payment, but now is hiding behind the crisis as an excuse?
We reviewed many leases for our clients, both landlords and tenants, and found ourselves teaching them some French — force majeure. We also have been called upon repeatedly to advise trade associations and nonprofits on issues dealing with upcoming conferences and meetings, some imminent, some a few months away, and some in 2021 and beyond.
Not that any of this was easy, but what we found when we carefully analyzed many of these situations was that at the outset, at least when there were governmental decrees that prohibited various types of activities and gatherings, a very good argument could be made that performance of a contract was excused. So most hotels and other venues with whom we dealt agreed to cancel events that would have violated shutdown orders. Most (not all) landlords were amenable to affording some degree of rent relief — deferment or abatement — to tenants that could not legally open for business. Most airlines refunded tickets. People who had purchased tickets for concerts, sports and other entertainment events usually got their money back although some promoters have tried to hold the funds to apply to a rescheduled performance.
But once the states of emergency have been rescinded and most types of businesses and venues can reopen, albeit temporarily on a restricted basis, then what? The fact that it again becomes legal and possible to hold these events is not necessarily the end of the story.
For example, suppose an organization has a conference scheduled in October 2020 and has guaranteed a minimum number of attendees, which is based on prior experience. The contract with the venue requires notice by June 15, 2020, for cancelation with minimal penalties, but thereafter, minimum guarantees would kick in, subjecting the organization to very substantial liabilities for falling short. Finally, assume that there is a force majeure clause that might permit the organization to cancel and receive a full refund if, at the time of the event, such a gathering would be illegal or impossible because of the continuation or re-imposition of an emergency decree with the restrictions. The problem is that on the cancellation deadline one cannot know whether such prohibitions will be in place on the date of the scheduled event. For starters, the organization would have to prudently anticipate that such an order would not be in place and that it would be legal to proceed with its event.
But what if no one wants to come!?!? What if the members are afraid to take airplanes to attend the event? What if the members in the at-risk age cohort aren’t leaving home until a very reliable vaccine or cure for this virus is available? Could the organization take the chance of risking its deposit and guarantee?
There are solutions, but they require a degree of understanding and cooperation between the parties. Just as landlords and tenants are usually well advised to work together to solve what really is their mutual problem, so it is here.
An approach we have proffered is to build in as much subjectivity as possible for the sponsoring organization in contracts still in the negotiation stage — or which have been finalized but are subject to unilateral cancellation. For example, we try to allow the sponsor to cancel if it reasonably estimates that less than a specified percentage of anticipated participants would likely attend.
This has applicability in other contexts such as contracts for entertainment and sports venues. The Metropolitan Opera has just announced the cancellation of its fall season. It is certainly possible that it will be legal in New York to hold performances of this nature at some time between now and the end of 2020, but even so, the Met realizes that many of its patrons are not going to attend even if social distancing, face masks, gloves, and other tools of risk minimization are employed.
So if we are representing a concert promoter, we will attempt to negotiate an agreement with the venue that our client can cancel for no penalty if we reasonably expect that less than a certain percentage of our typical number of attendees are likely to purchase tickets.
Where we have a retail tenant with good bargaining power, we will attempt to include clauses in new leases and renewals that will expressly excuse payment of rent during a force majeure event (often leases do not excuse payment of rent even during a force majeure situation) and provide a termination option if sales fall below a certain threshold, making it economically impractical to continue.
We are just beginning to confront these issues. We believe that resort to some relevant metrics would be fair to all parties. We will follow up with a later article to report the extent to which these approaches gain any traction.
Searle E. Mitnick
410-576-4107 • firstname.lastname@example.org
For additional information on the impact of the coronavirus, visit our COVID-19 information hub for a list of up-to-date content.