The impact of COVID-19 continues to be felt throughout the economy, with a collapse of demand in basically every consumer-facing industry, including restaurants, hotels, airlines, gas stations, and non-grocery retail stores. These problems flow through the economic food chain, with storefronts unable to pay landlords, who in turn have trouble paying their lenders. They may well be exacerbated in coming weeks as different jurisdictions issue “stay at home” orders. Many businesses have questions about how to raise new capital, put off their obligations to creditors, and other restructuring-related issues.
In what may be a “canary in the coalmine” moment for many businesses, the chairman and CEO of Cheesecake Factory has released a letter to all of the chain’s landlords stating that it will not be making any rent payments in April 2020. He stated forthrightly that “[d]ue to these extraordinary events, I am asking for your patience, and frankly, your help.” He explained that “[t]he severe decrease in restaurant traffic has severely decreased our cash flow and inflicted a tremendous financial blow to our business.”
Subway and Mattress Firm have issued similar letters to landlords, along with proposals to rework their commercial leases. While a restaurant chain like Cheesecake Factory is in the position of being able to tap into an existing credit line, many smaller tenants will be making tough decisions in the face of limited cash on hand, negative revenue projections during the crisis and relative uncertainty thereafter.
FLB’s attorney team is here to help our clients through this difficult time, providing timely legal advice on a landlord’s options in the face of defaults by commercial tenants. Many commercial leases are highly detailed and may contain contingency and force majeure language that deals with pandemic or government closures. For some smaller landlords and properties, leases likely contain less guidance and require a deft hand to respond to desperate tenants while preserving your rights. Residential landlords are in a different situation still, in part because evictions are currently stayed in Pennsylvania.
Taking a Practical Approach
Landlords and property owners must also take a practical approach. While you may have the right to sue or evict a tenant who temporarily refuses to pay rent, they may not have funds to be recovered. Moreover, if there is not another potential tenant available to take over the space, it may be in everyone’s best interest to make a deal in these uncertain times. Some large landlords have adopted a policy of waiving or deferring rent for a time. However, even where all parties are in agreement and have the best of intentions, it pays to memorialize any agreement so that everyone knows where they stand for the future.
Small businesses with an otherwise viable business plan may also turn to bankruptcy protection under the new Small Business Reorganization Act that went into effect in February 2020 and was expanded by the Families First Coronavirus Response Act. This Act was intended to make a new, cheaper and faster bankruptcy process available to more small businesses. Landlords whose tenants are forced into bankruptcy may have additional considerations, such as the potential for the bankrupt tenant to assign the lease under the Bankruptcy Code.
We remain available to help and counsel you in these difficult times. Although our physical office is closed by order of the governor, our lawyers are working remotely and available by phone and email. Please contact us using the form below, or give us a call at 610-797-9000. We wish you well during these extraordinary times.
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