Landlord waiving rents amid coronavirus: It’s ‘good business’
Bedrock CEO Matt Cullen on why he decided to wave up to three months of rent for Detroit small businesses and restaurants during coronavirus.
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April 1 marks the beginning of a new month. It also means that a new lease or rental payment for small and large businesses around the United States is due. But April 2020 is unlike any month in our lifetime. Businesses are closed and a majority of Americans are practicing social distancing and sheltering at home due to the coronavirus pandemic.
So what should businesses do about those hefty rent payments? Can they refuse to pay?
Before we answer that question, consider this. Real estate and how much rent you pay has always been a function of location, location, location. The location typically determines among other things, how much visibility you get for your business, access to customers and foot traffic among other things.
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During the good times, landlords can charge a premium for customer traffic for coveted locations like Times Square in New York or the best mall in town. But with coronavirus shutting 1 in 4 Americans in their homes all over the world, what does location matter when you can only travel within the confines of your own four walls?
Faced with this new paradigm, the Cheesecake Factory, a national restaurant chain, unknowingly took a leadership role on the rent issue that could wind up being adopted by small businesses. The chain is flatly telling its landlords that when people cannot leave their homes, the premium rent paid for customer traffic to their coveted locations is unwarranted.
But doesn’t the Cheesecake Factory, like businesses everywhere have rent obligations under a contract or lease? No matter what?
Not exactly. A lease is a contract just like any other legal agreement and unless they made provisions for something like this, by including a "force majeure" clause in their leases, it may be difficult to get out of paying rent.
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Generally, a "force majeure" is an event that is beyond the control of the parties that prevents performance under a contract and may excuse performing things like paying rent.
Unfortunately, most landlords remove force majeure clauses and want you to pay rent no matter what – but there may be some legal doctrines that might help businesses even in the absence of a force majeure clause.
The drop in customer traffic and mandated shutdown of business may be events that "frustrate" a contract, meaning that the current crisis makes the contract physically or commercially impossible to perform. This could include paying rent because cash flow has been reduced to zero due to zero customers. These events could make the rental contract worthless to business owners which may make the contract frustrated or impossible to be performed.
Nevertheless, when parties enter contracts, they also agree to act in good faith. Every contract has an implied covenant of good faith and fair dealing, so when circumstances change, each party should work it out.
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And that may be exactly what we’re watching here. Although the Cheesecake Factory told its landlords that it can’t pay the rent, the company also said that as a rational and responsible tenant, and that while this situation is unpredictable, that the duration and effect are unknown, let’s work through it. In essence, it said to its landlords, please be reasonable and understanding. Which is what we all should do under the circumstances in these turbulent and simply crazy times.