Unfortunately, real estate owners and operators must anticipate that the pandemic will cause a series of negative cascading effects, some of which are beyond their reasonable control as the health emergency intensifies in the coming weeks. These include tenants seeking rent relief because their businesses have either ceased operating or are experiencing a dramatic drop in demand, contractors unable to perform or delayed in performing services owed to the landlord due to disruptions to supply chains and/or the available labor force, lenders unwilling to complete loan transactions due to a material adverse change in circumstances, tenants with employees infected by COVID-19, the effect that that could have on the health and safety of other building occupants, and the list goes on and on.
What should real estate owners and operators do? Although each situation is different and presents its own set of risks and challenges, there are several measures that every commercial real estate owner or operator should consider in the coming days and weeks ahead.
First and foremost, the primary focus should be the health and well-being of the public (whether that’s the real estate owners’ or operators’ employees or those of its tenants or vendors that come upon the property). It is imperative that real estate owners and operators stay informed about the news pertaining to COVID-19. The Centers for Disease Control is a key resource and frequently updates its website with new information and guidance for individuals and businesses. Real estate owners and operators should also keep abreast of guidance from local and state health authorities about information in their communities.
Second, real estate owners and operators should consider taking the following measures:
Third, real estate owners and operators may need to consider whether and when to close office buildings, retail centers, and other facilities for periods of time and whether such closures will prevent them from complying with their lease obligations.
Lastly, a lease, property management agreement, construction contract or other real estate centric contract likely includes a provision that temporarily excuses a party’s inability to perform a contractual obligation if they are prevented from doing so because of a circumstance that is beyond their reasonable control (a so-called force majeure provision). While certain impacts of the COVID-19 pandemic may qualify as a force majeure event, force majeure provisions normally require the delayed party to promptly notify the other party of the unavoidable delay and to take reasonable steps to mitigate the effects and duration of such delay. However, force majeure provisions normally state that force majeure events do not excuse a party’s obligation to pay money owed.
Conclusion. Real estate owners and operators must carefully monitor this fluid and rapidly evolving National Emergency and actively work to mitigate any potential impacts that it may have on their real estate holdings. Klehr Harrison will be an invaluable partner as we help our clients successfully navigate through these most turbulent times.
Please note, on April 5, 2020, the Pennsylvania Secretary of Health issued an Order mandating enhanced cleaning and disinfecting requirements for owners of large buildings. The Cleaning Order applies to owners of buildings of at least 50,000 square feet used for commercial, industrial or other enterprises, including but not limited to facilities for warehouses, manufacturing, commercial offices, airports, grocery stores, universities, colleges, government, hotels, and residential buildings with at least 50 units.”
Author, Stephan Cutler is a partner and the co-chair of the Real Estate & Finance Department at Klehr Harrison.