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Flattening The Coronavirus Curve and How New York State is Helping Businesses






The conversation around the domestic spread of the coronavirus has been centered on “flattening
the curve,” with closures of local businesses and schools, a shift to working from home, and
appeals for social distancing.

Hitting the pause button on the U.S. economy, however, has had its consequences, including
massive job losses, sharp declines in business revenues, increases in real estate foreclosures and
bankruptcies and disarray in the capital markets. In April the conversation is now shifting to
include how to restart the economy amid a pandemic that may not have yet peaked.

To Pay or Not to Pay: Issues Concerning the Payment of Rent During the Coronavirus Pandemic

Already, people and businesses are faced with the difficult demand of paying their rent expenses
when there are no customers or income coming through the doors.  The question on every tenant’s
and landlord’s mind: Do tenants have to pay rent during this unprecedented and extraordinary
time? There are several places to look for an answer.

Look to the Lease

Since rent is typically a function of a negotiated lease, the first place to look in answering the
question is the lease itself. Although every lease is different, most commercial leases and many
residential leases contain a force majeure clause that excuses performance in the event of certain
unforeseeable circumstances outside of that parties’ control.

Typically, the events triggering a force majeure clause are war or natural disasters, but the clause
may include events like pandemics or government ordinances. Even if the clause does not include
triggering events that apply directly to the COVID-19 pandemic, an argument could be made for a
court to interpret it and apply it in light of its purpose, namely, the frustration of the purpose of
the lease due to unanticipated events that are beyond either parties’ control. A Court may find that
a government mandated shutdown of businesses, like that ordered by Governor Cuomo, and the
resulting mass layoffs meet this standard.

Look to the Common Law

But what happens if the lease either does not include a force majeure clause or the included clause
specifically excludes the payment of rent from an excused obligation, as is the case in many
leases?  There are two common law doctrines that may still provide an answer: the doctrine of
frustration of purpose and the doctrine of impossibility of performance.

To invoke the frustration of purpose doctrine as a defense for non-payment of rent, the frustrated
purpose must be so completely the basis of the contract that, as both parties understood, without
it, the transaction would have made little sense.  In the commercial context, the obvious intended
purpose of a lease is to provide a space for the service of the tenant’s customers. Given Governor
Cuomo’s COVID-19 orders requiring the shutdown of non-essential business, this doctrine most
strongly applies to businesses requiring a physical location and foot-traffic to operate. The
doctrine does not apply, however, if the business can remain open, even if just virtually, but
experiences a decline in income due to fewer customers. The doctrine also would not apply in the
residential context because the purpose of the lease – providing shelter – can still be fulfilled.

The doctrine of impossibility or impracticability, on the other hand, excuses performance when
the “destruction of the subject matter of the contract or the means of performance makes
performance objectively impossible.” Just like with a force majeure clause, the impossibility must
also be produced by an unanticipated event that could not have been foreseen or guarded against
in the contract. “Financial disadvantage” is not a basis for invoking this doctrine, however, and
because one’s inability to pay rent is likely caused by a lack of revenue, it is unlikely to be
applied successfully under the current circumstances.

Look to Legislation

Legislation surrounding the Coronavirus may also provide an answer if the lease and the common
law do not.

In the short term, the risk of eviction for failure to pay rent is minimal. On March 20, 2020,
Governor Cuomo signed Executive Order No. 202.8, stating that, for 90 days, “[t]here shall be no
enforcement of either an eviction of any tenant residential or commercial.” Two days later, the
Chief Administrative Judge of the New York State courts issued an administrative order
prohibiting all non-emergency/non-essential filings in any case, including new eviction petitions.

The orders do not alleviate obligations to pay rent, however. They only stay the consequences of
failing to do so. Although eviction proceedings are stayed for now, there will come a time when
they can begin again. Rest assured, the failure to pay rent during the stay period will be used as
grounds for lease terminations and new eviction proceedings.

There is proposed legislation circulating to address this problem. For example, on March 23,
2020, New York State Senate Deputy Majority Leader Michael Gianaris introduced a bill seeking
to protect residential and commercial tenants alike who suffered financial difficulties as a result of
the COVID-19 pandemic and the mandatory business closures by waiving rent payments for
certain residential tenants and small businesses for 90 days. In other words, rent and late fees
otherwise due during the 90 days would no longer be collectable.

Recognizing the adverse impact on landlords, the proposed legislation also provides that landlords
facing a “financial hardship” due to the loss of rent would be entitled to forgiveness on their
mortgages in an amount based on a formula in the proposed legislation.

Of course, there is no guaranty this proposed legislation will become law, as it still needs several
approvals. In the meantime, New York City is attempting to pass legislation that would have a
similar effect for its residents.

Look to Each Other

Although courts and legislation aid in the resolution and solution of COVID-19 difficulties among
citizens, they are not a panacea. One of our country’s greatest strengths is its people’s ability to
come together in times of need to overcome adversity and hardship. Speaking with your landlord
or tenant about the problems you are both facing may result in a faster, more certain, and a
mutually beneficial resolution.

Discussions should not start with an outright refusal to pay rent or a demand for all rent that is
due, but with an effort to solve everyone’s problem. Perhaps the parties can reach an agreement to
make the rent payments that would be due now payable as a balloon payment at the end of the
year or the lease term. If that is not an option, the parties could agree to continue making the rent
payments, but in smaller amounts spread out over time until business and the economy picks up

Because stress and emotions are running high, you should strongly consider having counsel deal
with your landlord or tenant or their counsel. The Licatesi Law Group, LLP regularly assists
landlords and tenants in their lease negotiations and litigations, and stands ready to assist you
reach your goals in overcoming the coronavirus pandemic.

If you or a loved one is suffering financial harm, please contact:

Jeanine Oberster, Esq.
(516) 478-0205
[email protected]

Michael A. Licatesi, Esq.
[email protected]

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