The necessity to shut down huge swaths of our economy in an effort to flatten the curve of the Covid-19 pandemic has caused hardships throughout our community, but perhaps no one has borne the brunt more than small business.
This burden is especially hard on commercial tenants that have been forced to close their doors by and the State of Emergency declared by both the Governor of Florida and Miami-Dade County Mayor Carlos Gimenez.
These financial and operational issues have made it impossible for many tenants to continue to pay the current rental payment as it comes due this month.
How will Tenants and Landlords handle this situation?
Some Landlords will take a hard line, arguing that the risk falls on the Tenant and that Tenants needs to fund operations through the assistance programs offered by the Small Business Administration, including the $10,000 Emergency Grant available to almost all businesses.
It is important to note that while Governor DeSantis’ recent Eviction and Foreclosure Moratorium prohibits the filing of both residential and commercial foreclosures, only residential evictions are prohibited and it likely we will see many commercial evictions moving forward.
Many other Landlords will be willing to work with Tenants, given the cost of eviction and the time required to find a new client, particularly during this pandemic crisis.
Tenants are not without recourse, and many are bringing forth arguments that the pandemic crisis, and the declarations of state of emergencies in response, has frustrated the very purpose that caused them to enter into the lease.
Frustration of Purpose
Frustration of purpose is a defense available to release a party from a contract when an event substantially frustrates a party’s principal purpose, and the non-occurrence of the event was a basic assumption of the contract, and the occurrence of the event in question is not the fault of the party asserting the defense.
In plain language, the frustration of purpose defense excuses performance by a party where the value of performance regarding the subject of an agreement has been frustrated or destroyed.
A tenant using this argument would argue that the COVID-19 pandemic and the business restrictions put in place in response to the pandemic represent completely unforeseeable events that have significantly altered the circumstances and the purpose of the Lease Agreement such that performance by the Tenant would no longer fulfill any aspect of its original purpose when entering the lease agreement.
An example of frustration of purpose would be a tenant operating a massage parlor that can no longer operate under the emergency orders. A restaurant does not fit as neatly into this category, however, as the emergency order still allows food take-away and delivery.
Impossibility of Performance
Performance of the Lease Agreement obligations- specifically those related to rent payment- may have also become impractical or impossible for Tenants. Similar to the frustration of purpose defense, the defense of impossibility and impracticability may excuse non-performance by a party within a contract when an unexpected intervening event occurred.
Impossibility is not only strict impossibility, but impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved. Florida Courts have stated that, under the doctrine of impossibility of performance or frustration of purpose, a party is discharged from performing a contractual obligation which is rendered to be impossible to perform, and the party neither assumed the risk of impossibility nor could have acted to prevent the event rendering the performance. See Hopfenspirger v. West, 949 So. 2d 1050, 1053-54 (Fla. 5th DCA 2006).
Supervening governmental action and regulations are among several types of business risks which implicate the impossibility defense under Florida law.
Depending on the specific terms in their lease agreements, many Tenants may attempt to argue that the pandemic and the emergency orders issued in response thereto have frustrated the very reason they entered into their leases and their performance, including payment, is impossible, because they are prohibited from carrying on their business.
Many tenants are approaching Landlords using this argument, not to request termination of their leases, but as part of an effort to be released from responsibility for rental payments during the time they are prohibited from operating their businesses, but in exchange agreeing to continue paying for utilities, taxes and insurance during closure.
This too shall pass
Business and uncertainty do not mix well, but both Tenants and Landlords need to remember that this pandemic will pass at some point and things will get back to normal, be it 30, 60 or 90 days.
So it behooves tenants and landlords to take the long view, avail themselves of the assistance programs offered by the Small Business Administration, and negotiate a solution that allows the parties to meet each other half-way and ensure that everyone is ready to get the economy fired back up as soon as possible.
David Winker, Esq. is a real estate attorney in Miami.
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