Whose Calamity (Risk) Is It?

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The COVID-19 Coronavirus is responsible for millions of words that would never have been written in its absence, even ours today. We have no special understanding of this virus or its impact. So, don’t expect us to add to two clear aspects: general confusion and uncertainty. Instead, we’re going to Ruminate about allocating risk and assigning responsibilities in situations where no party is at fault.

In our leases, we already accept that risk is and can be allocated for events, not in the control of a party. Think about negotiated provisions dealing with a loss of electricity or a temporary roadblock.

But what about calamities in general? If the reason a tenant can’t conduct its business at a particular location is related to that tenant’s business but isn’t the tenant’s “fault,” should its landlord share in the “loss”? Suppose a tattoo parlor has to suspend or close its business because of governmental health concerns about a disease being transmitted through tattoo parlors, though not this particular one? Should the “market” be that such a lease can be terminated because the tenant’s intended use is no longer lawful? By implication, a landlord should not be allowed to lease space to such an unlawful business. Certainly, if a liquor store tenant is forced to close because it was selling alcohol to under-aged persons, that tenant, not its landlord, should bear the loss. But, what if an ordinance barred liquor stores or if prohibition were reimposed? Is it “tough luck” or is this a shared risk between a landlord and a tenant? Before taking sides, put yourself in the shoes of someone who has no stake in the outcome, someone who isn’t an advocate. Think about it this way: not only can’t the tenant operate a liquor store, but the landlord can’t allow liquor to be sold at its property. Should a landlord be permitted to collect rent from what would be an illegal business? There is a Latin term taught in law schools: in pari delicto. It means “equal fault,” and not just under a contract. It applies when the parties are “all guilty of a crime.”

What about specific calamities? How about if the police block a tenant’s door as part of an investigation, the reason for which was not caused by the tenant? Should the tenant’s rent be abated during the time the space is unavailable for business? What about if a shopping center is closed by the police for an investigation, the reason for which was not caused by either the tenant or the landlord? Should the tenant’s rent be abated during the time the space is unavailable for business? What if a two square mile area is closed and the property is within the area? Should the tenant’s rent be abated during the time the space is unavailable for business? Don’t jump on Ruminations. We’re just asking. We’re just troubled; we don’t have an answer.

What if governmental authorities impose a quarantine and customers can’t shop and employees can’t work? Should the tenant’s rent be abated during the time the space is unavailable for business? Should the landlord be entitled to collect rent, effectively be insulated from what is going around? Does the presence of insurance make a difference? Does the mere availability of insurance make a difference? Again, we don’t have an answer.

What if it is discovered that a tenant’s customer had become ill because of a transmittable disease? Should or can a landlord force all of its tenants to close for business and require every tenant to disinfect its own premises? How about forcing all tenants to close for 14 days, something akin to a “property” quarantine? Would it make a difference if the property’s leases allowed for the establishment of new “rules and regulations”? How about closing an entire shopping center to disinfect the common areas? Who should pay? Is this a legitimate part of common area or operating costs? Is work done to leasable space includable within common area or operating costs? Should or must rent abate?

“What has been will be again, what has been done will be done again; there is nothing new under the sun.” [Ecclesiastes 1:9]. There is ancient law dealing with these issues. Real property, in almost all cases, farms, was either leased on an annual basis or was subject to sharecrop arrangements. What happened in times of drought when the farms were unusable for their intended purpose? In short (and in general), the rule was that if the drought were localized, i.e., limited to the given farm or only a few neighboring ones (such as when a river’s tributary dries up), the tenant bore the risk. If the drought were community-wide, the property owner took the risk (i.e., the tenants didn’t have to pay rent). How would that play out today? What should the market “say”? Is this only a matter to be resolved on bargaining power? Even it is, what should the norm or default be?

Yes, we hacked this out at the last minute, just as it appears many COVID-19 articles are being written. So, we know what we wrote may be somewhat incoherent or poorly edited, but that’s what happens when one needs to run off to search for hand sanitizer and toilet paper.

There’s no need for any reader to count. Today, we’ve used 34 question marks.

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Comments

  1. Michael Sievertson says:

    On a related note: Given the current COVID-19 issue, the thought occurred to me the other day that maybe we should all look at our force majeure provisions to address pandemics.

  2. Cheryl Dow says:

    I’m sure many real estate lawyers–on both sides–are stopping to look at their leases. From what I am seeing most leases would not require the tenant to continuously operate during a government shutdown or even if labor or materials were not available or if a situation was beyond the “reasonable control” of a party. However, I believe many leases also provide that such a “force majeure” does not excuse the payment of rent. At that point, tenants need to look to their insurance coverage to see under what circumstances their business interruption coverage will kick in. Is a declaration of area emergency covered? What if the local/state/federal jurisdiction does not declare such an emergency but the tenant either can’t get supplies or its employees are in self-quarantine? Harder questions are where the tenant is not open for business yet as it is still under construction. And the landlord also should be looking at its loss of rents coverage. All issues I believe we will need to be examining in the coming days.

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