As COVID-19 has shut down significant portions of the economy in recent weeks, all businesses have been forced to adapt to a new reality. Property owners have been particularly affected by the various stay-at-home orders, which, in many cases, have drastically restricted, or even halted entirely, the day-to-day operations of their commercial tenants and led to decreased income or even unemployment for their residential tenants. Additionally, real-world circumstances surrounding COVID-19 and governmental regulations seem to be changing almost daily, and property owners need guidance to make informed decisions about the future of their businesses.
This article provides practical guidance to property owners regarding how they can protect their assets during the COVID-19 pandemic. The first part of the article discusses steps that any property owner can consider taking during this uncertain time. The second part of the article provides specific recommendations for different classes of property, highlighting how each may be uniquely impacted by COVID-19.
General Considerations for Property Owners
The following is a list of actions that property owners may consider taking to help protect their assets:
- Consult with your legal and financial advisors regarding the impact that potential delays in rent and other income streams may have on your business and its obligations. Take time to review your obligations under loan documents, leases, other agreements, and local statutes, ordinances, and regulations to understand what payments or obligations may be delayed or considered for modification. Try to determine an order of priority for your obligations, and work to address the most pressing needs first.
- Review your loan documents for clauses relating to force majeure (e.g., “acts of God”) and other provisions that may be applicable or relied upon during any business or income interruptions caused by COVID-19. Most force majeure clauses do not excuse a party from its obligations but rather delay them, and many force majeure clauses have carve-outs for payment obligations. But the exact language and impact of force majeure clauses can differ substantially from contract to contract. It is therefore worthwhile to determine if your business may be able to benefit from treating COVID-19 as a force majeure event under each contract to which it is a party.
- Review any leases for force majeure clauses and other provisions that may be applicable or relied on by tenants during this time. You should also evaluate your potential remedies under such leases, including the application of security deposits against any amounts owed and your ability to evict tenants for nonpayment or other reasons. However, in addition to the leases, you also need to review your loan documents and any applicable laws and regulations regarding the application of security deposits in the event of a tenant’s default. Some states put restrictions on how and when a security deposit can be used for unpaid rent. You should also review and comply with applicable laws and regulations regarding evictions (including potential “freezes” on evictions) during the COVID-19 emergency period.
- After discussing the impact of COVID-19 with your legal and financial advisors, establish communications with your lender(s) regarding the potential disruption of the satisfaction of your obligations under the loan documents (both monetary and non-monetary), and ways in which you may be able to restructure such obligations during the COVID-19 pandemic. You must be cautious, however, not to create a default or breach of representations and warranties or trigger recourse liability under the applicable loan documents. For example, if you intend to grant your tenants rent deferrals, abatements, or other concessions due to the impact of COVID-19, you may need to first obtain the written consent of your lender(s).
- Contact insurance providers to review liability, business interruption, and other applicable insurance policies to determine if insurance proceeds may be available, and gauge appropriate timelines for filing insurance claims.
- Establish clear and timely communication channels with tenants to address issues as they arise. To be effective, these communication channels need to be mutual – tenants must keep you informed of any COVID-19-related issues affecting them or their employees or guests, and you should provide information to tenants on a timely basis regarding any steps you are taking to protect against the spread of COVID-19 at your property. With this communication channel in place, both you and your tenants will be able to make informed decisions.
- Review the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan (EIDL), and the EIDL Advance programs administered by the Small Business Association (SBA) or any other governmental relief program (e.g., Disaster Loan) to determine if loans or other benefits may be available. Congress has currently approved funding for the PPP and EIDL programs, which allows more small businesses to benefit from the SBA loan programs. As with the initial allocation of funds, additional funds for these programs will likely run out quickly, and if you would like to maximize your chance of benefiting from these programs, you should submit an application as soon as practicable.
- Stay up-to-date with any guidelines or restrictions imposed by the federal, state and/or local authorities regarding COVID-19.
- Establish “best practice” cleaning procedures and enforce safety protocols for common areas and, generally, for the entire building. Do research into privacy or other possible restrictions and consider investing in testing protocols if an individual with COVID-19 is thought to have been on site.
- Consider providing complimentary hand sanitizer and/or disposable masks in common areas.
- Review the above recommendations with your property manager and confirm that they are also informed of governmental regulations and guidelines and that they are taking the necessary steps to enforce those guidelines.
Other Considerations for Owners of Retail Properties
Owners of retail properties face specific challenges during the COVID-19 pandemic because their tenants have been so dramatically impacted by widespread stay-at-home orders. These orders have prevented many businesses from operating or significantly reduced their ability to generate any revenue. As many retail tenants may have difficulty paying rent during these stay-at-home orders, owners of retail properties should consider taking the following steps:
- Encourage your tenants to take advantage of the SBA loan programs mentioned above. Particularly, retail tenants may be able to benefit from the PPP, which allows a business to use loan proceeds to pay rent if certain conditions are satisfied. The loans can also be forgiven if the tenant retains a certain percentage of their employees for certain stated periods and satisfies other requirements. If tenants are able to secure SBA loans or other financing, they will be in a better position to pay any rent that is due to you.
- Make efforts to facilitate contactless deliveries to tenants if possible. Retail owners can also assist tenants with enacting social distancing procedures for the tenant’s employees and customers, such as by allowing common areas to be used for waiting/queue lines or curbside pickup to reduce the number of customers in a store at one time.
- Try to ensure that tenants are complying with governmental orders and guidelines regarding the operation of “essential” and “nonessential businesses.” Retail property owners should also try to ensure that tenants are not allowing large gatherings prohibited by governmental orders and that tenants are deploying proper social distancing protocols with regard to their employees and customers.
Other Considerations for Owners of Office Properties
Generally, many of the considerations listed above for retail properties will also be applicable to office properties. In addition to the measures listed above, owners of office properties should also consider taking the following steps, if possible:
- Encourage your tenants to develop and implement work-from-home policies, practices, and abilities. Consider assisting with anything that may help your tenant remain productive during the stay-at-home orders associated with COVID-19.
- It may also be worthwhile to incorporate the potential increase in remote working demands into future business planning. There may be a demand for smaller office spaces, or communal office spaces, given that so many businesses have been forced to adapt to the new reality of working from home. There may also be a demand for office space designs that more easily facilitate social distancing. This could be a way to differentiate yourself and your properties by facilitating new demands that businesses may have in response to COVID-19.
Other Considerations for Owners of Multifamily Properties
Owners of multifamily properties have a different set of concerns relating to COVID-19, given that their tenants are individuals and families, as opposed to businesses. If you are the owner of a multi-tenant property, you may want to consider taking the following steps:
- Facilitate contactless deliveries for tenants and provide clear instructions for third parties making such deliveries.
- Enforce social distancing measures in common areas. This may require closing common areas if they are being used by tenants to congregate in violation of applicable social distancing guidelines.
Other Considerations for Owners of Industrial Properties
Industrial property owners are also being affected by COVID-19 – some industries have been forced to shut down and such industrial tenants may therefore be unable to satisfy rent payment obligations, while others have been deemed “essential” and have therefore continued to operate. To prepare and manage either scenario, industrial property owners should consider taking the following steps:
- As outlined above with regard to retail properties above, you should encourage your industrial tenants to take advantage of any available SBA loan programs or other governmental relief programs if possible.
- Review the list of essential businesses in your state and try to make sure your tenants are not violating any orders or regulations relating to COVID-19. If your tenants are considered “essential” and are continuing to operate, be sure to facilitate proper social distancing measures within the premises. The tenant may require additional space, supplies, or equipment to allow its employees to remain six feet apart from one another and to comply with other social distancing best practices.
Please also take a moment to visit Taft’s COVID-19 Toolkit, which can be accessed here. The Toolkit contains up-to-date information regarding many of these and other issues relating to the current COVID-19 crisis. You can also use the Toolkit to stay informed on state and federal regulations, guidelines and laws relating to COVID-19. Finally, please contact us if you have any remaining questions regarding the information provided in this article or how your business should respond to COVID-19.