5 Things to Be Most Aware of While Signing a Lease During COVID
Renting a space for your business in Florida is a significant expense. And when you have to negotiate a lease during these uncertain times, it makes it all the more challenging. But then lease negotiation During COVID shouldn’t be a tug of war; at least not when you’re aware of critical aspects and relevant issues.
We can’t stress this enough; you need to work with good CRE brokers in Florida. That said, below are five things savvy business owners need to be aware of regarding the legal aspects of commercial lease obligations in this post-COVID business era.
1. Force majeure clauses
Force majeure (FM) is a contractual clause that alters or frees a party from obligations and liabilities in the event of an unforeseeable event or circumstances beyond their control, causing significant interference with business operations.
FM is not usually included in all lease contracts.
While it might provide a ground for which a business tenant can invoke non-performance, it is often drafted in a way that does not totally excuse tenants from making regular rental payments. COVID-19 may well constitute an FM event, although that is still dependent on lease-specific languages and interpretations.
2. Inverse Condemnation (IC)/Taking’s Clause (TC)
Inverse Condemnation is another contractual clause business owners and stakeholders for good lease navigation during COVID.
Since the coronavirus outbreak, governments at all levels have created various mandates, one of which includes orders to restrict businesses to curb the spread of the virus. The Takings Clause of the Fifth Amendment makes the government liable for compensatory relief for interferences like this.
Several court decisions have held that the TC might apply even if the government restricts property use rights without seizing the property. But several others have also held that government authority to protect public health and safety falls short of the Takings Clause. Still, not all cases of police power/government authority, in this case, are protected from TC.
3. Impossibility of contracts
Impossibility/Impracticability of Performance (IOP) is a common-law defense that may provide a basis for an excuse for performance. This is applicable when performing business duties have become unfeasibly difficult or impracticable due to events happening after the contracts that are of no fault of the breaching party (tenant/business owner).
These are available in most jurisdictions across Florida.
But establishing this in courts is another challenge since Florida courts rarely apply them. COVID-induced orders mandating business closures are reasonable defenses for non-performance. However, whether this will apply to lease performance will vary on a case-by-case basis. Still, it’s worth discussing with CRE brokers how this may impact lease navigation during COVID.
4. Frustration of Purpose (FOP)
FOP is, in some ways, similar to IOP. This can be invoked when unforeseen circumstances make a party unable to fulfill the purpose and obligations for which they have entered the contract.
The difference here is that while IOP applies when it becomes impossible to perform, FOP, however, applies to the contract’s purpose. It only holds when one party finds that the purpose (known to both parties) for which it bargained to enter the agreement is being frustrated due to a lack of consideration by the other party.
Defending this in court will require proving beyond doubt that the circumstances are beyond the party’s control. While COVID-19 will, no doubt, frustrate the purpose of some lease contracts, success, on this basis, will depend on individual cases.
5. Business Interruption Insurance
Finally, Business interruption insurance is insurance coverage is one of those things you’ll also need to consider for lease navigation during COVID.
In Florida, this kind of insurance coverage helps supplement business income if a covered peril or damage results in the party’s inability to perform its business duties.
Truth is, business interruption evaluations are quite complicated. While this policy often covers business income, property, and liability, policyholders still have a duty to prove, in this case, that COVID-19 caused “direct physical loss or damage” to their business.
Times have changed, and it’s no longer business as usual.
If you’re considering entering a commercial lease agreement in Florida anytime soon, you’ll want to ensure that some or all of these are carefully considered. Again, you’ll also need the professional assistance of good CRE brokers in Florida to help make the entire process a lot less stressful and far more profitable.