US should underwrite business insurance, attorneys say

Frustrated by Congress' inability to pass another COVID-19 stimulus bill, many brick-and-mortar businesses are initiating lease renegotiations with their landlords but they fear that won't be enough to save them.

The pandemic is dragging on too long and there is too much uncertainty, they say.

"Our practice of real estate law requires certainty in our transactions," said Daniel Teitelbaum of Blackacre LLP in Manhattan Beach. "When we first worked on lease amendments in April and May, everybody was saying 'well at the end of May, this will all blow over and it will be back to normal.'"

One solution involves the federal government stepping in to act as some sort of insurance underwriter, so insurers could offer government-backed business interruption policies, Teitelbaum said.

"Similar to what you see with flood insurance is what is necessary," Teitelbaum said. "While some people think everybody is cutting deals and changing the force majeure clause, we need a pandemic insurance program, we need an act of Congress and we need the storm to pass."

The Pandemic Risk Insurance Act introduced by House Financial Services Committee Member Carolyn Maloney, D-New York, is a proposed program in which insurers would be required to make policies available without an exclusion, limitation or other special condition for pandemics. In return, the program would reimburse participating insurers for a certain amount of losses from those events -- referred to as the federal backstop. However, the measure has received little support from Republicans, despite widespread backing from the business community.

In the meantime, tenants are seeking additional protections in lease agreements, such as bolstered force majeure clauses -- a provision excusing a party from delays in performing certain obligations otherwise required by the lease -- in case the pandemic continues indefinitely or if a second or third wave hits. Tenants are also seeking automatic rent deferrals or abatements for future mandated closures or occupancy restrictions.

Fernando Landa of Crosbie Gliner Schiffman Southard & Swan LLP in San Diego represents landlords in commercial real estate and transactional matters. He said most landlords have recognized the hardships tenants face, particularly in retail, and are agreeing to lease amendments.

While rent deferment seems to be the most commonly agreed to alternative to paying rent during the pandemic, landlords may allow for rent abatements in rare instances, depending on the property use, Landa said.

"It somewhat depends on the specific situations for the tenants," Landa said. "For example, a gym that has not been able to operate because of local restrictions, is a better candidate to receive some rent abatement, where an office tenant that can continue to operate viably and is unaffected by the pandemic, I'm not seeing many of those tenants get any form of rent relief. Overall, you're not seeing much rent abatement but rather the rent will be deferred until a future period."

When it comes to force majeure clauses in existing leases, Landa said most well-drafted ones will not excuse payment of rent.

"In some instances, in more tenant friendly leases, the force majeure will apply to the payment of rent, so yes that has been used as leverage to negotiate rent deferment or rent abatement but I think on the whole, you're seeing leases saying force majeure will not be the basis for the nonpayment of rent."

While Landa expects a bolstering of force majeure clauses in future commercial leases, most landlords will only agree to them if they are narrowly tailored to apply to COVID-related events.

Steven Adair MacDonald of Steven Adair MacDonald & Partners, P.C. in San Francisco represents both commercial tenants and landlords in lease negotiations. He said negotiating during a pandemic is, "more of an art, than a science."

"So far, I'm not dealing with legal issues in any serious way, the issues I'm dealing with are mainly economic and practical realities," MacDonald said. "We're asking 'how the heck can we all hedge our bets for 2021?' We're all taking a hit."

"If you're a commercial tenant who owns a house, gee I hope your landlord doesn't know about it, because they're going to shrug their shoulders and whether they can evict you or not, they'll just sue you for a civil contract action, and they'll win a judgment against you," MacDonald said. "Whether it's 30,000 or 300,000, they'll collect it on the equity on your house."

Rather than renegotiating an entire contract, Macdonald advises clients to add a one-page amendment, reflecting a rent-reduction for a certain period of time.

One of his tenant-clients recently came to a rather creative solution with their landlord in which the landlord agreed to reduce the rent by half for one year if the tenant agreed to pay in one lump sum, MacDonald said.

"My client borrowed it and paid it, and now he's still in business to some extent but he's got his rent reduced and everybody is pretty happy."