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July 28, 2020 Practice Points

COVID-19 Meets Commercial Landlord-Tenant Law

Do executive orders and public health orders relieve commercial tenants of obligations under a lease? Or, how I learned to stop worrying and love the force majeure clause.

By Andrew M. Toft

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On July 16, 2020, five large retail chains filed a complaint for declaratory judgment and other relief asking to be relieved, in whole or in part, of their obligations on a total of 145 commercial leases for stores in malls and other developments across the country due to the impact of COVID-19 on their ability to conduct business. See The Gap, Inc., et al. v Brookfield Properties Retail, Inc., et al., Circuit Court, Cook County, Illinois County Department, Chancery Division, Case No. 2020CH04984. Plaintiffs requested a jury trial. The causes of action include the following:

  1. Breach of contract against all defendants.
  2. Declaratory Relief (No rent or expenses owed) against all defendants
  3. Unjust enrichment (against all defendants)
  4. Declaratory relief for recission, cancellation and termination by four of the plaintiffs on 52 of the leases against many of the defendants
  5. Declaratory relief (reformation) against all defendants

The term force majeure is not used in the complaint, but its language indicates the force majeure clause in every lease at issue will be the focal point of the litigation. “Unforeseeable,” “frustrated,” “impossible,” “illegal,” “impracticable,” “deprived,” “prevent,” “forced to suspend,” “mistake,” and “failure of consideration” appear repeatedly throughout the allegations and causes of action. If any of the claims proceed to trial and final judgment is entered, the judgment and any appeals could have a substantial impact on landlord-tenant law, at least in the state of Illinois and likely beyond as it is a test case for many of these tenant claims. The lawyers who drafted the subject leases, whether on behalf of tenants or landlords, will probably have an opportunity to watch every word they used scrutinized to a degree they never expected.

In addition, the actions of government, particularly state and local government, in response to the appearance and spread of COVID-19 will be closely examined to determine whether those actions were so extreme that the plaintiffs are legally entitled to relief from their obligations under the leases either in whole or in part. The plaintiffs allege that jurisdiction is proper in Illinois based on the relationship that the defendant Brookfield Properties Retail, Inc., which allegedly has its principal place of business in Illinois, has with all the defendant mall owners. Defendant Brookfield Property REIT, Inc., an affiliate of Brookfield Properties Retail, Inc., is alleged to have operated, managed and indirectly owned the defendant mall owners.

Baseball great Yogi Berra once said, “It’s tough to make predictions, especially about the future,” and it is tough to predict what impact this litigation may have. Will the litigation lead to bankruptcy petitions by the defendant mall owners to get the case out of state court? Will the litigation have an impact on REITs around the country and investments in REITSs? Will other similar cases be filed around the country? Will issues of bankruptcy remoteness and the structure/organization of SPEs become a hot topic? It is far too early to tell what issues will develop, but this is a case that should interest real estate litigators until it is resolved and possibly even afterwards.

Andrew M. Toft is of counsel with Hoffman Nies Dave & Meyer, LLP, in Greenwood Village, Colorado.

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