Our Firm is complying with all Local and State directives regarding COVID-19. However, service to our clients remains uninterrupted as we work remotely and we are here to help you navigate the issues arising from the pandemic. Our attorneys have already begun addressing some of the difficult legal issues facing our clients and we hope the information below may provide important guidance to our clients as they deal with the consequences of COVID-19.
UPDATED (April 1, 2020):
Real Estate – The COVID-19 pandemic is having a profound impact on commercial real estate throughout the United States. As a result, landlords, tenants and property managers are assessing the best way to deal with this crisis. While tenants seek to reduce their costs, landlords must find ways to preserve their cash flow and maintain occupancy to ensure long-term financial stability. Our attorneys are prepared to assist landlords and tenants to employ a variety of strategies to address any real estate issues you may be facing, including preparing any necessary documentation. The most common strategies employed by our attorneys to resolve rental payment issues have been:
- Rent Reduction: The landlord can reduce the tenant’s rent for a portion or all of the term left on the lease. The usual forms of rent reduction are to reduce the base rent, operating expenses, or both. With regard to retail, it is common to convert base rent to percentage rent.
- Rent Deferral: A landlord can defer a portion of the tenant’s rent but requires the tenant to repay the deferred rent at a later time, either in a lump sum or by increasing subsequent monthly rental payments.
- Rent Abatement: If a tenant is significantly past due on rent payments, a landlord may agree to forgive a certain amount of the past due rent if the tenant remains current thereafter.
- Loan Conversion: Rather than abating past due rent, a landlord may agree to convert the past due rent into a loan from the landlord to the tenant that is payable over time. The tenant would, however, continue to pay the current rent as it accrues. The loan is then evidenced by a promissory note that is cross-defaulted with the lease.
Even if a landlord may have the right to refuse rent abatement or deferral, it may be in the landlord’s best interest accommodate the tenant if doing so keeps a tenant open and operating or reflects a decision to protect the long-term economic viability of the property. For instance, shopping center owners may have leases that contain co-tenancy provisions. Many times when a minimum core of tenants close, other tenants may cease paying all or a part of their rent (whether rightfully under their lease or not). Although there is a balance, all decisions should be made based upon addressing both immediate needs and long-term recovery. It is important to note that many strategies for restructuring leases have the potential of creating significant tax consequences and, therefore, both the landlord and tenant should consult with their tax advisers.
Please do not hesitate to contact us if you are dealing with lease issues related to COVID-19.
Commercial Litigation – Our attorneys are actively advising our commercial clients in several industries to assist with their response to the pandemic. For example, our attorneys are advising clients regarding contractual provisions such as Force Majeure clauses. Many commercial contracts contain force majeure clauses that list specific events that excuse a party’s performance of its obligations under the contract. Whether COVID-19 constitutes force majeure and a defense will likely turn on the particular language in your contract. We are closely reviewing your contracts and we can advise on whether COVID-19 is covered. Our analysis includes whether a pandemic is specifically listed, whether it is covered by a catch-all provision (whether it was foreseeable), and whether there is a link between the failure to perform and COVID-19. We are assisting clients in planning a response in the event a force majeure provision is invoked by another party to your contract.
We are advising clients on the application of the Uniform Commercial Code (UCC). For example, the UCC has provisions that may apply to the sale or lease of goods that are disrupted by COVID-19. Specifically, there are provisions of the UCC applicable in Texas which state that a party does not breach a contract if performing the contract has been made impractical/impossible (1) due to an event occurring, which no party to the contract expected to occur when the contract was made, or (2) due to good faith compliance with a governmental order or regulation.
We are also actively advising clients on other contractual defenses, including Impossibility of Performance and Acts of God. Impossibility generally applies when a supervening and unexpected event makes performance of the contract impracticable or impossible. Courts have only applied this defense in a few scenarios, including when a change in the law makes performance illegal. Economic hardship or increased costs of performance alone are usually not enough to implicate force majeure or an impossibility defense. The law also recognizes that events caused by an Act of God may be a defense to liability. The defense is typically recognized in cases involving the fury of Mother Nature – hurricanes, floods, and storms, and is generally a natural act that is so unusual or unprecedented that a reasonable person would not be expected to guard against it. To apply, the unnatural event cannot be mixed with any fault of the person asserting the defense. The applicability of these contractual defenses will depend on the particular facts surrounding the contract and the factual circumstances faced by the parties. To be sure, many will argue these defenses should cover COVID-19.
Please do not hesitate to contact us if you are dealing with commercial issues related to COVID-19.
Employment – We are assisting clients in responding to employment issues arising from the pandemic. We are actively advising clients on the effect of H.R. 6201 “Families First Coronavirus Response Act,” which has been signed into law and extends the Family Medical Leave Act and Paid Sick Leave for affected employees. Here is what you need to know:
- Business Exceptions – Businesses with more than 500 employees are not covered. Covered employers will be eligible for refundable tax credits for payment to employees as provided by this law. Employers with fewer than 50 employees can apply for an exemption from providing paid family, medical or sick leave if the required leave ‘would jeopardize the viability of the business.”
- Paid Family Leave – Employees who have been on payroll for at least 30 calendar days will be eligible. The law requires pay of two-thirds of employee’s regular rate or applicable minimum wage, whichever is greater, but is limited to $200 a day for a total of $2,000. Family leave applies to the following:
- Employee who is caring for a son/daughter whose school or place of care is closed, or childcare provider is unavailable, due to COVID-19 precautions
- Employee is caring for someone who is subject to a federal, state, or local quarantine order or told to self-quarantine due to concerns related to COVID-19
- Employee is experiencing substantially similar conditions as specified by the Secretary of Health and Human Services, in consultation with the Department of the Treasury and the Department of Labor
- Paid Sick Leave – The employer is prohibited from requiring an employee to use PTO prior to paying this sick leave. Sick pay is based on the employee’s regular rate or applicable minimum wage, whichever is greater, but limited to $511 per day and $5,110 total. All employees are immediately eligible for paid sick leave that are unable to work (or telework) because of any of the following:
- Employee is subject to a federal, state, or local quarantine order related to COVID-19
- Employee has been told by a healthcare provider to self-quarantine due to COVID-19 concerns
- Employee is experiencing COVID-19 symptoms and seeking medical diagnosis
Please do not hesitate to contact us if you are dealing with employment issues related to COVID-19
Insurance – We are keenly aware of the multitude of problems COVID-19 has caused with logistics, supply chains, and workforce/personnel. Businesses may be able to look for compensation to address business losses related to COVID-19 in their insurance coverage. Most businesses maintain insurance policies which cover their premises and general liability matters, while others may have contracted for additional coverages related to “business interruption.” Generally, business interruption will only cover losses if (1) the business property is physically damaged and/or (2) if the means of accessing the business property (e.g. roads, highways, etc.) are physically damaged or impassable. However, businesses in certain industries such as food/beverage service, hospitality, and health and wellness may have purchased additional coverages which may provide coverage for business losses due to COVID-19. Additionally, many businesses in the construction, oil and gas, and industrial sectors maintain environmental insurance policies. Environmental insurance policies are typically written to pertain only to pollutants and hazardous materials, but some policies provide coverage for bacterial and viral issues.
The key point is that each insurance policy is unique and contains its own limitations, exclusions, additional coverages, and definitions. We encourage you to review all your insurance policies to determine if you can recoup some of your losses through insurance. We appreciate that understanding and interpreting insurance policies can be difficult, confusing, and time consuming. We also understand that business owners, operators, and managers have a host of other tasks which required their immediate attention. If you have any questions regarding your insurance policies and whether they provide coverage for any losses you are currently experiencing, we encourage you to contact us for a telephonic consultation and policy review.
Construction Industry –The construction industry is no different than the rest of the country when it comes to the concerns related to the impact of COVID-19. Cases have now appeared on every populated continent and in highly impacted areas some plants have closed and workers told to stay home. Companies and governments in the U.S. at the state, local, and federal levels, are implementing restrictions on residents which drastically impact many industries. Among the potential issues the construction industry can expect to deal with are problems obtaining labor and supplies, and the resultant construction delays.
As our construction clients know, many construction materials are imported, ranging from structural steel to fixtured and fasteners. As foreign and domestic manufacturing of construction materials slow or foreign importation ceases, there is a potential for material shortages and/or the rationing of materials. The Uniform Commercial Code statutes applicable to the sale of goods states that a seller impacted by events rendering performance impossible or impractical has an obligation to “allocate production and deliveries among his customers.” Because material shortages can rapidly develop into construction delays, we recommend that our construction clients take steps to protect themselves on projects which may be affected by material shortages linked to the COVID-19 virus.
Below we provide a few considerations and an example if you are reviewing your contracts on your own. However, we appreciate that during this time you may be tending to a variety of other business and family matters. Please do not hesitate to contact us to for a review of your contracts.
1. Force Majeure (Act of God) Contract Provisions: Construction contracts typically contain a force majeure clause. If you are unable to locate a force majeure/act of God clause, review the general conditions or general requirements. Though the words “force majeure” may not actually appear in the clause, look for language that provides for a time extension or excuses performance in the event of delays caused by an act of god, act of government or other events beyond the reasonable control of the contractor/subcontractor. Usually force majeure provisions allow for an extension of time without additional compensation to the contractor.
For example, the AIA’s A201 (2017) General Conditions § 8.3.1 authorizes a time extension when critical progress is delayed by “labor disputes,” “unusual delays in deliveries,” “unavoidable casualties” or “other causes beyond the Contractor’s control,” among other things.
Supplier Agreements: Many supplier agreements contain language that excuse the supplier’s performance because of force majeure events or disruptions in the supply chain and obligate the contractor to pay for increased pricing or prevent the contractor from terminating the supply agreement and seeking alternative sources.
Timely and Ongoing Communication :In the event of a construction delay due to delays in material delivery, contractors should give the owner/general contractor timely notice of the delay in material delivery. Under the AIA’s A201 (2017) General Conditions, notice of the delay must be given not later than 21 days after the delay comes to the contractor’s attention or the claim for time may be waived. See § 22.214.171.124. However, other construction contracts may have much shorter time notice requirements.
Failure to give timely notice may result in the contractor waiving contract rights to additional time due to the delay, no matter the reason, including a global pandemic. Even if your construction contract does not provide for time extensions due to delays caused by events beyond your control, contractors should notify the owner anyway. Legal doctrines such as impracticality or impossibility of performance may provide a contractor with relief from delay damages in the event work is critically delayed due to flood, fire, injunction or global pandemic.
Additionally, contractors and subcontractors should keep the owner and/or general contractor updated on any developments or progress. If the expected delivery of needed materials changes (sooner or later), let the owner and/or general contractor know. If materials from another source are available, and your current supplier agreement does not prohibit it, contractors may consider changing to a different supplier.
2. Labor Shortages: Although delays in material delivery are an immediate concern to the construction industry, COVID-19 may eventually cause labor issues which could slow down or suspend work. Many of the government “Stay at Home” or “Shelter in Place” Orders currently in effect (such as in Galveston County and Harris County) allow for “Essential Businesses” to remain open and operating. These “Essential Businesses” include the operations and maintenance of 16 critical infrastructure sectors identified by the National Cybersecurity and Infrastructure Agency (CISA) including: public works construction, residential and commercial construction, airport operations, water, sewer, gas, electrical, oil refining, roads and highways, public transportation, solid waste collection and removal, internet, and telecommunications systems (including the provision of essential global, national, and local infrastructure for computing services, business infrastructure, communications, and web-based services), financial institutions, defense and national security-related operations, essential manufacturing operations provided that they carry out those services or work in compliance with social distancing requirements to the extent possible.
Regardless, workers worried by the COVID-19 may still decide to stay home rather than risk exposure to the COVID-19 virus. The same general rules for material/supplier issues noted above apply to labor shortages. Review your contracts’ force majure/act of God clause, as well as the general conditions or general requirements and maintain consistent and timely communications with owners and/or general contractors as events develop.
It may also be prudent for contractors discuss potential exposure events owners or project managers to proactively develop mutually agreeable protocols and safety measures if COVID-19 exposure occurs on a project or job site.
Additional construction contract provisions contractors should evaluate at this time include price escalation clauses, change orders, insurance, work or project suspension, and termination rights—which govern what relief contractors are entitled to in the current COVID-19 situation, and the scope of any relief. If projects could be delayed by COVID-19 or other unforeseeable events, consider consulting Johnson and Associates’ attorneys to develop a plan to deal with your construction issues based on your actual contracts and circumstances.