Legal Effects of COVID-19 on NYC Commercial Leases | PropertyShark

Legal Effects of COVID-19 on NYC Commercial Leases

If the government declares a state of emergency again due to another public health crisis and initiates a government mandated lockdown, are you prepared? Legally speaking, that is.

Even after the substantial effect that COVID-19 had on the economy, governments have not publicly changed their stance on how to handle such situations. Consequently, now there is precedence and also mechanisms in place. Therefore, to prepare for what seems inevitable, one needs to know the influence that the pandemic has had on commercial leases.

In short, the result will be dependent on the negotiated terms in the lease. That’s because New York statutes are silent on this matter and, thus, one should not rely on the courts for assistance.

For example, one of the provisions that tenants have tried to rely on to obtain forbearance on rent payments was through a general force majeure clause. However, courts have typically construed this narrowly and ruled that it did not apply to COVID-type situations unless specifically addressed in the lease.

Similarly, tenants have also tried applying the common law defenses of frustration and impossibility doctrines. Broadly speaking, these do allow for unforeseen events to excuse lease obligations. That said, the burden of proof is very high for a tenant because it must literally be impossible to have used the premises.

Essentially, if a tenant has any possibility of mitigating damages, they are not excused from their lease obligations. As such, the courts will construe this doctrine narrowly and have ruled that the terms called for in the lease are not dependent on profitability.

Ultimately, courts have reaffirmed the sanctity of contract over any perceived injustice because businesses need to consider all risks — no matter how distant — in their business plans. This can also be freely negotiated into the lease to the mutual benefit of both parties.

Furthermore, the courts have not favored tenants as one may have expected given the devastating effect on businesses. Hence, it’s imperative for all parties involved to specifically address COVID-type situations in their lease.

Original Article Published on PropertyShark

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John Pak, serves as the Real Estate Chair at the Law Offices of Pardalis & Nohavicka. He is a transactional attorney specializing in acquisitions, dispositions and leasing.  A graduate of Brooklyn Law School, he received his BA in Political Science from New York University.  Prior to joining PN Lawyers, John owned his own private law practice for 15 years and a title company for 6 years.