HomeReal Estate NewsCommercialHow will evictions, lease litigation work amid the Pandemic?

How will evictions, lease litigation work amid the Pandemic?

Minnesota’s Mall of America missed another payment on its $1.4 billion mortgage, Bloomberg reports. The missed payment put the mall more than 60 days delinquent, according to people with knowledge of the financing. June marks the third consecutive month the mall missed a property payment.

The Mall of America is one of the North America’s three largest shopping centers, featuring 500 stores. Despite its size, Mall of America has faced financial challenges because of the Coronavirus pandemic just like most of its counterparts. The mall’s main attractions like an indoor theme park and Nickelodeon Universe, as well as its hundreds of retail stores have been closed for months due to health directives. Restaurants and movie theaters opened earlier this month but at reduced capacity.

Financial hardship and missed payments because of COVID-19 is not exclusive to the Mall of America, however. A lot of commercial real estate tenants stopped paying rent after their doors closed during the pandemic. Landlords began to send eviction notices, but courts started to close also, leaving all parties in a holding pattern. Tenants and landlords could work out a resolution on their own, take up a costly federal or state court case or wait until eviction courts reopened.

Now businesses and eviction courts alike are beginning to reopen across the country and questions about rent obligations remain. Dykema real estate attorneys Brian Forbes, Michael Vogt and Steven Mroczkowski recently wrote about what the CRE industry can expect when it comes to evictions and legal litigation as business operations begin to get back underway. As of press time GNC, the vitamin and supplement retailer has just filed for Chapter 11. It said it would close nearly 1200 locations.

Eviction courts won’t move as quickly as normal

The eviction process typically moves fast compared to standard litigation. The COVID-19 pandemic has slowed that process down a bit either because of federal, state or local orders that banned evictions or because courts were closed during the state of emergency. Those bans are being lifted and courts are reopening, but landlords should not expect to be able to evict non-paying tenants right away. Cases could be delayed for months because of the vast amount of lease defaults, which have created a significant backlog of eviction cases.

The case landlords and tenants will make

Tenants and landlords will likely look to see if there’s any force majeure language in their lease agreement that might excuse payments or other obligations during unforeseen circumstances like a pandemic. There hasn’t been a major pandemic since 1918, so there’s a good chance that “pandemic” won’t appear in standard force majeure provisions, the Dykema team writes.

Additionally, even if there are force majeure provisions in the lease agreement, they may not excuse tenants from paying rent.

Landlords will likely ask courts to enforce the lease agreements as they are written, because landlords have to pay their lenders and comply with their loan terms. Meanwhile, tenants will present arguments to excuse their non-payment such as impossibility, impracticability or that COVID-19 was an act of God. Unless there’s force majeure language that clearly excuses non-payment, courts usually hesitate to deviate from how the lease is written.

CRE tenants in Texas and other states will still argue that the state’s “stay at home orders” made it impossible to meet the terms of their contract impossible and they should be excused from performing under the lease.

“Given the unprecedented nature of the ongoing pandemic and its impact on businesses everywhere, it is still unclear how courts throughout the nation will apply the equitable defenses mentioned above,” the Dykema team wrote. “One thing we should expect is that there will likely be patchwork of inconsistent decisions until at least a year from now when appellate court decisions begin providing guidance. This makes a party’s decision to litigate over a tenant’s nonpayment of rent more difficult than usual and may be a good reason for both landlords and tenants to try negotiating a resolution before bringing the dispute to court.”

Landlords, tenants may negotiate practical solutions

The Dykema team recommended landlords and tenants move forward with negotiating their own solutions despite eviction courts reopening. Doing so could more quickly resolve each of the parties’ current burdens that COVID-19 brought on—the tenants’ need for financial relief and the landlords’ need to avoid tenant defaults and vacancies. If the dispute is only about non-payment, state and federal judges might avoid ruling and encourage the parties into an early dispute resolution process like mediation anyway.

“While evictions and lease litigation will be unavoidable for some disputes, the added time and expense of litigation in the post-pandemic world, together with the uncertainty of how courts will treat a tenant’s failure to pay rent when the tenant was forced by the government to cease operations, make litigation an even riskier option than it would normally be,” the Dykema team wrote. “So, landlords and tenants should work to find a practical resolution that resolves their current dispute and minimizes the chance of future litigation. To do this, both parties will need to be realistic about the post-pandemic use of the property and each party will likely need to ‘give a little’. (For example), rent deferral or abatement in return for extending the term or waiving an option to extend.”

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