April 7, 2020
By Allan C. Galis and Taylor L. Dove, special to Savannah CEO
In these uncertain times, our commercial landlord clients are asking many questions. Tenants are requesting rent abatements or notifying landlords that they will not or cannot make upcoming rental payments for various reasons related to the COVID-19 pandemic. Many of our commercial landlord clients have inquired about their legal rights in light of these unprecedented circumstances. In this article, you will find answers to common questions we are receiving. For advice regarding your specific situation, please call us at 912-236-0261.
Can my tenant withhold rent due to COVID-19?
Probably not. It is important to review the lease agreement for any language applicable to this situation. Some leases contain “Force Majeure” provisions that release a party from liability or obligation because of extraordinary events, but they rarely protect a tenant from its financial obligation to pay rent.
Even where a lease expressly provides that force majeure does not excuse rent payment, tenants have proposed various legal theories purporting to justify nonpayment where a law or ordinance has been enacted that requires the tenant’s business to close. For example, Governor Kemp recently enacted a statewide executive order that requires businesses that are not “Critical Infrastructure” to cease all activities except for “Minimum Basic Operations” that are defined in the order. It also requires residents to shelter in place and maintain social distancing, and it bans public and private gatherings outside the household.
Many tenants have cited similar local ordinances preceding Governor Kemp’s order as justification for withholding rent under various legal theories, such as impossibility and frustration of purpose. Now that Governor Kemp’s statewide order has been enacted, we anticipate that many tenants will rely on that promulgation. While there is no doubt that many businesses will be severely impacted by these ordinances and the pandemic generally, and may even be required by the terms of such ordinances to stop serving the public, it is unlikely that a tenant has the right to withhold rent because of a local ordinance absent language in the lease to the contrary. If a law or ordinance truly requires a tenant’s business to completely cease its operations for an extended period, it would still be unlikely that a tenant could simultaneously remain in possession of the premises and withhold rent. Further, there is little Georgia legal authority to support a tenant’s position that a temporary ordinance (particularly one that does not require a business to completely cease its operations, like the ones enacted in Chatham and Glynn Counties) would permit the rescission of a lease agreement.
How should I respond to a tenant that has requested or notified me that it will not pay rent because of COVID-19?
It is a best practice to send a letter to the tenant in accordance with the notice provision of the lease agreement to notify it that the lease agreement does not allow it to withhold all or any portion of the rent, and that you do not agree to waive or abate rent for the current or any future month during the lease term.
If you receive a payment of less than the full amount due, you should send a notice that you are considering it a partial payment and that you are not waiving the balance that remains due for that period. Under either scenario, these actions will help preserve your right to collect the full amount of rent that is due. If you do not respond, your silence could be considered a full or partial waiver of the tenant’s rent obligation. With your rights under the lease protected, you are in a position to see how this rapidly changing situation evolves over the coming weeks.
What should I do if I want to help my tenant and abate, waive, or otherwise adjust some or all of rent?
Depending on the circumstances, you may decide that the best business decision is to provide an accommodation to certain tenants. If you desire to make such an accommodation, we recommend that it be made pursuant to a written lease amendment signed by both parties. Before proposing such an amendment, however, you should first review any applicable loan documents to determine whether lender approval is required, as some loan documents prohibit a landlord from agreeing to rent accommodations without lender approval. If applicable, it may also be prudent to inform your tenant that you are unable to waive rent without a mortgage concession from your lender, but that efforts are being made to seek such a concession.
Assuming that rent accommodations are permitted under your loan documents or you obtain lender approval, there are several options to consider with respect to a lease amendment. For example, the parties could agree to amortize abated rent over the remaining lease term, extend the lease term to recapture any abated rent later in the term, or apply any existing security deposit with a requirement to repay the security deposit within a certain amount of time.
Allan Galis is a partner with HunterMaclean’s business litigation and transportation groups. He can be reached at agalis@huntermaclean.com. Taylor Dove is an associate with HunterMaclean’s business litigation and bankruptcy and creditors’ rights groups and can be reached at tdove@huntermaclean.com. Both can be contacted by calling 912.236.0261 or www.huntermaclean.com
