Answers to Legal Questions About Real Estate During Coronavirus
In an era of uncertainty due to COVID-19 concerns, real estate investors, tenants and owners are seeking clarity in their business dealings.
Though each situation is different and will be driven by the terms of the particular legal agreements and circumstances of each case, there are some overarching takeaways for legal issues during this time.
With the help of Ari Krigel, a partner in the Real Estate Practice Group and a member of the food industry team at Freeborn & Peters LLP in Chicago, we offer insight into pressing commercial real estate questions during the COVID-19 pandemic.
Does My Tenant Need to Continue to Pay Rent?
In general, tenants do need to continue paying rent, says Krigel — even if the lease includes a force majeure clause. A force majeure event, aka “act of God," is one that cannot be reasonably anticipated or controlled.
“Many leases expressly exclude the payment of rent from being implicated by force majeure, so in most instances, rent is still due," says Krigel.
He adds that in most states, the law requires that a force majeure event be unforeseen and make performance impossible, not just economically difficult. However, there may be some courts that consider the COVID-19 pandemic an act of God if there are specific facts and circumstances and a lease that permits it.
Read your lease carefully, and speak with an attorney if the terms are unclear.
Does My Landlord Need to Continue to Provide Access to My Space and Perform Essential Services?
A landlord is required to provide access to a tenant's space, as well as utilities and any other services specified under the lease, says Krigel. However, he cautions, if a tenant stops paying rent or common area maintenance or utility expenses, that may alleviate the landlord's obligation to provide certain services.
Before cutting off essential services, Krigel recommends that landlords speak with an attorney to understand their rights and obligations, and to take actions that are reasonable.
“If you have a successful tenant, that's not something you want to lose," he adds.
Will Title Companies Continue to Facilitate Transactions and Issue Title Policies During Quarantine Periods?
Title companies are still conducting business, but there may be delays and logistical issues due to shelter-in-place and social-distancing orders, says Krigel. After all, many recording offices are closed at this time. Even if electronic recording is permitted, the county may still need someone physically present to accept the title documents.
In addition, many title companies are now including pandemic-related language in their policies, such as the following sample text:
"The company reserves the right to raise exceptions and requirements or determine that it will not issue a title policy based upon the details of the transaction, the review of the closing documents, and changes in recording and title searching capabilities resulting from COVID-19."
“The situation is dynamic, to say the least," says Krigel. “You need to be in close contact with your title company to ensure there are no closing delays."
Are ‘Time of the Essence’ Closings Automatically Postponed, and Are Deadlines in Contracts of Sale or Leases Automatically Suspended or Extended?
None of these things will happen automatically, which is why Krigel advises parties to stay in contact with one another and try to work out mutually acceptable terms.
“If you are unable to perform due to something outside your control, there may be a way to delay a deadline or obligation under a contract," he says. “It depends on the language in the document."
The good news, says Krigel, is that many dealmakers are being flexible in light of COVID-19 challenges. Buyers and sellers have been signing contract amendments and granting delays because they still want to close deals.
He cites a recent example of a buyer who couldn't get a report required for closing because of a shelter-in-place order. The seller was sympathetic to the situation, and both parties signed an amendment allowing the deal to proceed.
“The people who have the most flexibility will likely be the most successful over time," emphasizes Krigel. “Everyone's goal is to keep things functioning as much as possible, given the new reality."
Is a Completion Deadline in a Construction Contract Now Obsolete?
Whether there are shelter-in-place orders or social-distancing measures in effect, many construction projects have been deemed essential and will continue, says Krigel. However, force majeure clauses could impact construction contracts.
“If the provision is more general (i.e., “anything outside your control"), then you may be entitled to an extension," he says. Be aware, though, that some provisions are very specific as to what constitutes force majeure, and they do not include language about a virus or illness.
How Will Commercial Real Estate Contracts and Requirements Change as a Result of the COVID-19 Pandemic?
“There are going to be a lot of changes to documents," says Krigel. “Not just the forms, but also amendments to existing agreements."
Though these are trying times on all sides, he believes there are solutions beyond straightforward rent forgiveness or government intervention. For example, a landlord might offer rent abatement in exchange for a lease extension or an increase in rent over the term of the lease.
“The most important thing is to start a dialogue and try to reach a mutually beneficial solution," he says. “While it's difficult, there are ways you can work through it together and still have a successful long-term relationship."
