COVID-19 and Commercial Real Estate Leases in Minnesota

Coronavirus disease 2019 (“COVID-19”) has become a global pandemic, and Minnesota’s efforts to contain the spread of the disease are directly impacting commercial landlords and tenants. As of the date of this writing, Governor Tim Walz has issued Executive Orders closing bars, restaurants, and other places of public accommodation (see Executive Orders 20-0420-08, and 20-18) and directing Minnesotans to stay at home except to engage in necessary activities or critical sector work that cannot be done at home (see Executive Order 20-20). [Update:  As of April 17, 2020, these restrictions have been revised and extended by Executive Orders 20-33 and 20-38.  For the latest information, see Executive Orders from Governor Walz.]

The rights and obligations of landlords and tenants facing these challenges generally are determined by leases that were drafted before COVID-19 threatened Minnesota. Few commercial leases directly address the issues of an epidemic or emergency orders that restrict the activities of businesses and individuals.

On the other hand, commercial leases typically address a variety of issues that may be relevant to COVID-19 and its impacts, such as those listed below. The details vary from one lease to another, so it is important to review your own lease and to consult an attorney as needed.

  1. Force Majeure

Most commercial leases include “force majeure” provisions that extend the time for a party to perform an obligation, or suspend the obligation, while there is a delay due to causes beyond the parties’ reasonable control. Force majeure provisions typically list specific examples, such as “strikes, riots, acts of God, and shortages of labor or materials.” Force majeure provisions typically include a catch-all provision, for example, to cover “any cause or causes, whether or not similar to those enumerated, beyond the parties’ reasonable control.” However, force majeure provisions typically exclude the payment of money by the tenant.

Executive orders closing bars, restaurants, and other places of public accommodation fall under the “force majeure” provision of many commercial leases, to the extent that they prevent the tenant from performing non-financial obligations, such as:

  • Opening for business by a certain date
  • Continuously operating the business
  • Maintaining minimum daily hours of operation
  • Not vacating or abandoning the premises

Executive orders directing Minnesotans to stay at home may also fall under the “force majeure” provision of commercial leases, to the extent that they prevent the tenant from performing non-financial obligations because the tenant’s employees, customers, or contractors are prohibited from doing business on the premises.

On the other hand, many force majeure provisions specifically exclude the tenant’s obligations to pay money to the landlord. Likewise, the provisions of most commercial leases that require the payment of money or define a financial Event of Default do not provide an exception or extension for force majeure events. Therefore, tenants generally cannot rely on the concept of force majeure to avoid or delay the payment of rent, maintenance, utilities, insurance, or real estate taxes.

Commercial leases may require tenants to give prompt written notice of force majeure events to landlords in order for their obligations to be suspended or deadlines postponed. Even though COVID-19 is prominently covered in the news, landlords and tenants should review their leases to identify applicable notice requirements.

  1. Condemnation/Eminent Domain

Commercial leases typically allow the landlord or the tenant to terminate the lease in the event of a permanent taking of the premises by the government’s power of condemnation, also known as eminent domain. Some leases also allow the landlord or the tenant to terminate the lease in the event of a temporary taking of the premises, and provide that if the lease is not terminated, then rent will abate (not be owed) for the period in which the tenant is unable to use the premises.  Some leases also allow the landlord or the tenant to terminate the lease in the event that a significant portion of the premises is taken, or provide that rent will be reduced proportionately.

There are two primary issues related to eminent domain and COVID-19. The first issue is whether an executive order or other regulation falls within the scope of the condemnation/eminent domain provisions in the lease, triggering a right to terminate or an automatic abatement or reduction of rent. The second issue is whether an executive order or other regulation that prohibits operation of the tenant’s business at the premises constitutes a “taking” under the U.S. Constitution or the Minnesota Constitution, entitling the landlord or the tenant to receive compensation from the government.

In regard to the first issue, most condemnation/eminent domain provisions in commercial leases are narrowly drafted and contemplate the government taking possession of the property. However, it is important to review your lease to determine if the plain language in the condemnation/eminent domain section also applies to other government action that prevents use of the property.

In regard to the second issue, constitutional law professor Ilya Somin recently wrote a blog titled Does the Takings Clause Require Compensation for Coronavirus Shutdowns?, concluding that under current U.S. Supreme Court precedent, the answer is almost always going to be “no.” The answer probably will be the same under the Minnesota Constitution, because the Minnesota Supreme Court generally relies on cases interpreting the U.S. Constitution’s takings clause to interpret the similar takings clause in the Minnesota Constitution. See Wensmann Realty, Inc. v. City of Eagan, 734 N.W.2d 623, 633 (Minn. 2007).

  1. Waiver

Commercial leases typically contain detailed provisions regarding a voluntary waiver by the landlord of a tenant’s violation of any term, covenant, or condition of the lease.  Waiver provisions in a commercial lease generally include the following:

  • Any waiver must be in writing.
  • A waiver does not apply to any other term, covenant, or condition.
  • A waiver does not apply to any subsequent violation of the same term, covenant, or condition.

A waiver may be appropriate when the parties do not intend to change the terms of the lease, but agree that a particular requirement will not be strictly enforced in a particular instance.

In the context of COVID-19, any waiver of the timely performance of a tenant’s obligation(s) should be in writing, specifying the specific obligations that are being suspended or delayed, and stating the time period for which the waiver applies (or stating that the waiver will continue to be effective as long as certain executive orders or circumstances remain in effect.)

  1. Amendment

Commercial leases typically require that any amendment of the lease must be in writing. A written amendment clarifies that the parties have moved beyond discussion to form an agreement, and reduces the risk of current misunderstandings or future disputes.

COVID-19 poses unique challenges for landlords and tenants, because the situation is evolving on a daily basis, and it is unknown when things will return to “normal.” In addition, an amendment to one section of a lease may have implications for the rights and obligations of the landlord and tenant under other sections of the lease, even if they are not specifically addressed. Therefore, the advice and assistance of an attorney may be invaluable to identify issues and draft and negotiate appropriate amendments to the lease.