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May 2020
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May 01, 2020

Lease Defaults and Litigation are Expected to Rise in the Wake of COVID-19

The widespread shutdowns caused by the COVID‑19 pandemic have hit the commercial real estate sector particularly hard. Nationwide, billions of dollars in retail rents and other charges went unpaid for the month of April, as revenue streams dried up due to COVID‑19 lockdowns. With Michigan’s lockdown now extending through May 15, 2020, many businesses are grappling with how to address rent payments that are due on May 1st.
 
Although many businesses have weathered the storm so far, it is anticipated that the disruption caused by COVID-19 will result in a wave of lease litigation in the second half of 2020. This article provides a brief overview of issues to be mindful of while navigating business lease disputes during and in the wake of the COVID‑19 pandemic.
 
In the short term, collaboration is key.
 
Landlords should carefully consider their options when a tenant defaults for reasons relating to COVID‑19. In the short term, rushing to court is likely to be a frustrating endeavor. Governor Whitmer has issued Executive Order 2020-54, which places a moratorium on residential evictions until at least May 15, 2020. Although that order is targeted at residential evictions, many district courts have postponed all types of evictions, and as a practical matter it will be difficult to execute any eviction order until the stay at home order is lifted. Although circuit courts are accepting filings, they are not likely to fast-track or grant speedy relief in a typical case alleging that a commercial tenant failed to pay rent during the COVID‑19 lockdowns.
 
In light of these difficulties, parties to a lease may benefit the most in the short term by agreeing to defer rent. The parties should involve relevant lenders in those discussions. Keep in mind, however, that all of the uncertainties caused by COVID‑19 may eventually put your organization in a position where litigation becomes necessary. It is therefore critical to have any amendment or deferment agreement in a writing that is carefully drafted, with assistance of counsel.
 
In the medium to long term, protect your position.
 
In the longer term, deferring lease obligations may not be enough to avoid a larger dispute. Again, it is important take a proactive approach to safeguard your rights and position in the wake of the COVID‑19 lockdowns.
 
First, it is critical to understand your lease. Beyond the fundamental business terms, it is important to understand the parties’ respective rights and obligations, what the parties’ rights are in the event of default, and what defenses and other legal principles outside of the lease terms would come into play if the dispute ripened into litigation.
 
Second, you must protect your communications. People communicate in writing more than ever, and communications relevant to a lease dispute are typically discoverable in litigation. Parties can harm their position by making careless pre-suit communications as disputes develop – either internally or with the opposing party. Beyond this, certain lease provisions and remedies are only triggered if a party provides formal notice. This is where it pays to involve counsel at the outset of the dispute. The earlier a party understands its legal rights, formulates a strategy, and implements communications processes, the lower its risk of harming its position down the line. This is particularly important for landlords, as many remedies (including eviction) require advance notice that can be planned for or implemented now.
 
Finally, even if you expect the other party to come to the table for an amicable resolution, you should anticipate and prepare for litigation. The bottom line is that the COVID‑19 pandemic has increased financial risk across the board, which in turn increases the legal risks associated with commercial leasing. You can mitigate that risk by protecting your position now. And even if your strategy is to avoid litigation, it may become inevitable. A bit of proactive planning now will put a landlord, tenant or lender on the best footing if they are faced with defending or pursuing litigation down the line.
 
Contact Tom Amon at tamon@wnj.com for lease default questions or concerns.

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