Lease defaults and litigation are expected to rise in the wake of COVID-19

238

The widespread shutdowns caused by the COVID‑19 pandemic have hit the commercial real estate sector particularly hard. Nationwide, billions of dollars in retail rents and other charges went unpaid for April. With Michigan’s lockdown now extending through May 15, many businesses are grappling with how to address rent payments due in May and the following months.

Although many businesses have weathered the storm so far, it is anticipated this unprecedented disruption will result in a wave of lease litigation in the second half of 2020.

In the short term, collaboration is key. In light of these unprecedented difficulties, landlords should carefully consider their options when a tenant defaults for reasons relating to COVID‑19, as rushing to court is likely to be a frustrating endeavor.

Because Gov. Whitmer’s Executive Order 2020-54 places a pause on residential evictions until at least May 15, landlords may benefit most by agreeing to defer rent, engaging tenants in those discussions. Although the order is targeted at residential evictions, many district courts have postponed all types of evictions until the stay at home order is lifted.

Keep in mind, however, all the uncertainties caused by COVID‑19 may eventually put your organization in a position where litigation becomes necessary. It is therefore critical to have an agreement in writing that is carefully drafted with your attorney’s counsel.

In the long term: protect your position. Deferring lease obligations may not be enough to avoid litigation. It is critical to understand your lease, each parties’ rights and obligations, each parties’ rights in the event of default, and what defenses and other legal principles outside of the lease terms would come into play.

Parties must also protect their communications. You can harm your position by making careless pre-suit communications as disputes develop — either internally or with the opposing party. This is where it pays to involve counsel immediately. The earlier a party understands its legal rights, formulates a strategy and implements communications processes, the lower its risk of harming its position down the line. This is particularly important for landlords, as many remedies require advance notice that can be planned for or implemented now.

Even if you expect the other party to come to the table for an amicable resolution, you should anticipate and prepare for litigation. The bottom line is the COVID‑19 pandemic has increased financial risk across the board and the legal risks associated with commercial leasing. Each party can mitigate risk by protecting its position now, which will put a landlord, tenant or lender on the best footing if they are faced with defending or pursuing litigation down the line.

Facebook Comments