The novel coronavirus is impacting life throughout much of the world right now. Nevada’s Governor Sisolak declared a state of emergency on March 12, 2020. As part of that, the Governor began taking other administrative steps in an attempt to prevent the spread of the novel coronavirus which causes the Covid-19 disease. On March 29, 2020, The Nevada Governor issued Directive 008 which, in section 1, prevents lockouts, notices to vacate, notices to pay or quit, eviction, foreclosure, or other efforts to remove a commercial tenant until the state of emergency is lifted or the order is rescinded.[1] Pursuant to section 3, nothing in that order relieves a tenant of their duty to pay rent, although late fees must be waived during this period. Pursuant to Section 7, landlords are encouraged, but not required, to negotiate arrangements for payments of any rent payments which are missed.
Many businesses are suffering financial hardships due to the coronavirus. Some of those businesses may have difficulty paying rent. See Samantha Fields, I can’t afford rent for my small business because of COVID-19, Marktplace, April 1, 2020 available at https://www.marketplace.org/2020/04/01/i-cant-afford-rent-for-my-small-business-because-of-covid-19-what-can-i-do/.
It is impossible to provide a general answer to questions about the impact of Covid-19 on leases because a full analysis must be done in the context of the specific factual situation and particularly in light of the terms of the specific lease. In most cases, a commercial tenant will still be required to pay rent and will generally not be able to terminate the lease, but a landlord or tenant experiencing problems regarding their lease should have the individual situation evaluated by a qualified attorney.
The governor’s declaration explicitly does not excuse the payment of rent.
The governor has issued a number of directives in an attempt to address the emergency situation. Among other things, the governor has placed a moratorium on evictions, including evictions of commercial tenants. Directive 008, § 1. However, the most recent directive explicitly does not attempt to excuse the payment of rent. The governor has formally encouraged landlords to be willing to negotiate regarding any missed payments, but that sections lacks the force of law and does not create a requirement for any party. Id. at § 7.
Generally, the doctrine of frustration of purpose will not apply to relieve the responsibility to pay rent under a commercial lease.
There is a general doctrine under contract law where a party is excused from performing under a contract if the primary purpose of the contract is frustrated. More technically, the Restatement (2nd) of Contracts states that “Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.” The Nevada Supreme Court has discussed frustration in a commercial context and stated that it “applies to discharge a party’s contractual obligation when performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration….The doctrine of commercial frustration does not apply if the unforeseen contingency is one which the promisor should have foreseen, and for which he should have provided.” Graham v. Kim, 111 Nev. 1039, 1041, 899 P.2d 1122, 1124 (1995).[2]
It will generally not apply to relieve a tenant of the need to pay rent due to covid-19 for two separate reasons. First, frustration does not apply if the contract itself implicitly allocates the risk of the event that caused the issue. See e.g. id. Many commercial real estate leases contain clauses which require the payment of rent even if the business is for some reason unable to operate. Second, Covid-19 is unlikely to be deemed enough to frustrate the purpose of most leases under most circumstances. Most commercial leases are for comparatively long terms while the official state of emergency may last less than two months. That is unlikely to be adequate for a court to find that the value has been destroyed or substantially frustrated.
However, this remains fact specific. A lease may include a clause excusing rent if the business were shut down for reasons of health or safety. This clause may be labelled as a “force majeure” or “act of God” clause.[3] Alternatively, if the business had unusual circumstances such that an interruption of business would make resuming the business difficult or impossible the analysis of the commercial frustration doctrine for that particular business would likely be different.
Many landlords are likely to be willing to negotiate.
Even without legal doctrines which could pressure them, many landlords are likely to be willing to negotiate under the circumstances. As a practical matter, many landlords will find it more efficient to be flexible regarding rent than to attempt to evict a tenant after the moratorium has been lifted and find a replacement. However, while many landlords may find it in their best interest to negotiate, most will not have a legal obligation to do so.
Conclusion
There is no universal answer to whether or not a tenant is excused from paying rent or is entitled to terminate their contract without penalty due to Covid-19 and the state of emergency which it has created. Most businesses will still have an obligation to pay rent on their commercial leases, but that may vary by individual circumstances, especially the contents of the lease. Any business or landlord facing issues caused by Covid-19 would be well served consulting with an attorney that has experience with commercial leases.
[1] A limited exception exists for tenants that pose a serious danger, engage in criminal activity, or cause significant damage to the property.
[2] Internal quotation marks and citations omitted.
[3] “Force majeure” is derived from an old French phrase and was translated as “exceptional force”.