COVID-19 continues to disrupt a myriad of industries, leaving many questions and uncertainties in its wake. This is especially true in the real estate sector. In this article, Gil Feder, partner and chair of the firm’s Real Estate Litigation practice, explores real estate litigation trends impacting landlords and tenants as they move forward in this new normal.
Gil is a seasoned commercial litigator concentrating his practice on the representation of New York property owners, developers, landlords and tenants in commercial real estate matters. He has litigated highly publicized commercial lease, real property, mortgage, environmental, zoning, condemnation and hospitality disputes. Gil’s clients include some of New York’s largest hospital groups, leading financial institutions, REITs, retailers, celebrities, and high net worth individuals and families with large real estate holdings.
What’s next for your industry?
The biggest trend we are seeing in real estate litigation right now revolves around COVID-19 disputes, which arise when a tenant seeks a rent abatement or deferral, relying on COVID-19 as a reason for not being able to pay rent. There are a lot of issues at play in these disputes. Many tenants argue that because local governments enacted a shutdown that did not permit the tenants to open their businesses, or they were allowed to open but consumers were not frequenting their businesses due to stay-at-home orders, the tenants can’t afford to pay their rent. At the same time, landlords must pay their lenders.
Now that the courts have reopened, we’ve seen hundreds of COVID-19 disputes filed in New York alone, with many hundreds more across the country. Since this is new territory and we do not have decisions on this issue in New York State yet, lawyers, landlords and tenants can only guess at what the courts will do. Case law in New York often sets the precedent for the rest of the country in the area of real estate litigation. Will tenants be able to use a COVID-19-related defense, or will they have to pay rent no matter what? These are some of the questions we are waiting to get answers on.
In terms of the scale of the pandemic’s impact — legally, financially and culturally — this seems to be without precedent. Have there been any events like this in the recent past that you are drawing from to help advise clients on legal issues they are facing?
While we have not seen anything as disruptive as COVID-19, there are certainly some cases that may shed light on the issues. More important, landlords and tenants alike should be looking closely at their leases for abatement clauses, force majeure clauses, or “act of God” clauses. Many of these clauses, which address the impact of natural disasters on rent payments, were added to leases after the September 11 attacks, but they are very lease-specific. Sometimes the clause is written in a way that allows the tenant to forgo paying rent if there is a natural disaster, and in other instances the clause favors the landlord, so it is important to study your lease closely.
If the lease does not contain a force majeure clause, the tenant may still have options. Tenants are relying on common law principles. The first is Frustration of Purpose, which means that if the purpose of the contract is frustrated, a party may not have to perform under the contract. The second is Impossibility, meaning if it is impossible to perform under the contract, the party does not have to perform.
Another form of rent relief may come from the legislature. We do not know whether any states are moving in this direction, but it is something to watch for.
It is hard to predict how the courts and/or the legislature are going to decide the rent issues.
How has COVID-19 impacted the practice of real estate litigation? Is there anything that clients could/should be doing now to protect themselves as we continue on what we know is going to be the longer road back to “normal”?
COVID-19 has added a whole level of uncertainty to what were otherwise enforceable lease clauses. Now it is uncertain as to what will be enforceable, making it harder for both landlords and tenants to protect themselves.
First and foremost, a landlord or tenant should not take any action without first contacting their lawyer. Because of the uncertainty, landlords and tenants are in negotiations over rents abatements and rents deferrals. These negotiations may include the landlord simply giving the tenant a one month’s rent abatement or possibly giving the tenant until the end of the lease to pay back rent on the months they were unable to work. There are a lot of these types of negotiations going on right now, so I expect that we’ll start to see some creative solutions.
Negotiations taking place right now are certainly taking into account the tenant’s short-term and long-term economic outlook. Tenants able to successfully reopen are more likely to want to stay at their premises, and therefore are usually seeking short-term help. Tenants with a more uncertain economic future are obviously looking for greater concessions from their landlords. Indeed, certain negotiations taking place right now involve landlords agreeing to base some of the rent payments on the tenant’s future profitability.
What makes Loeb a leader in this space?
Loeb has long been a leader in the real estate industry. Our real estate litigators have been involved in precedent-setting cases that have shaped the real estate landscape in New York, Los Angeles and other markets across the country, and our commercial leasing team is one of the largest in Manhattan and one of the best in the U.S. We are familiar with nearly every type of lease, building, deal and ownership structure in the industry.
Our experience representing clients on both sides of leasing transactions allows us the insight and knowledge to understand the requirements and needs of both parties while being mindful of the long-term relationships landlords and tenants must maintain as we work to reach the best possible solution for our clients.
Our overall knowledge on both the transactional and litigation sides, coupled with the firm’s significant bankruptcy experience, makes us uniquely situated to advise clients through these unusual times. We are a one-stop shop when it comes to real estate matters, and we take pride in our ability to guide our clients every step of the way.