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How To Mitigate Loss When Canceling a Commercial Lease during COVID19

Updated: Jul 18, 2020

If you recently signed a lease for commercial space that you cannot use because of the mandatory closures of non essential businesses due to COVID19, you may wonder what options are available to mitigate loss. If you have yet to move in, can you get out of the lease without losing your deposit? Will you have to continue to pay rent on a space that cannot be used?

Force Majeure Clause

Review the language of the lease agreement. Specifically look for a paragraph that deals with unforeseen circumstances. This paragraph known as the “force majeure” clause lists situations like natural disasters and other events that are beyond the control of either party. The lease agreement may have language that specifically states what happens if “a local ordinance or regulation prohibits the use of the space”.

Business Interruption Insurance

Typically, business interruption insurance only applies to events that cause physical damage to the premises. However, there are proposed bills in several states (New York being one of them) to force insurance companies to cover businesses affected by COVID19. If the bill passes, insurance companies would be required to provide coverage retroactively. For more details, visit the National Law Review website and read New York Assembly Bill A01226.

Clear Communication

Both parties need to clearly communicate about how COVID19 has impacted their business. If the space can be used but needs to be modified to accommodate social distancing (partitions, cleaning, etc.), both parties need to reach an agreement as to how to share that responsibility.

Both Parties Agree to Cancel & Split Costs

The lessor and the lessee may have to negotiate a deal whereby both parties minimize financial loss. The terms of such a deal will depend on the circumstances. But it may be fair to split deposit on the space and cancel the contract in cases where the tenant has not moved in. If the tenant is already in the space, the landlord may need to reduce rent or enter into some type of rental deferment/loan agreement.

Apply for Governmental Relief Programs under the CARE Act

The Federal government is providing financial assistance to help businesses impacted by COVID19 with the recently enacted CARE Act. Programs available under the Act can help businesses cover their operating costs. For more information, visit the Small Business Administration website.

This information is provided for general informational purposes only. No information contained in this article should be construed as legal advice and does not establish an attorney-client relationship.

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