COVID-19 and Real Estate

Dale A. Whitman is the James E. Campbell Missouri Endowed Professor of Law Emeritus at the University of Missouri in Columbia, Missouri.

As this is being written, the entire world is in the midst of a natural disaster with few precedents. The costs in terms of human life and human happiness are vast. The virus pandemic is also having enormous economic consequences, triggering a recession of almost record scope. Thousands of businesses have closed, and millions of people have lost their incomes.

Some commercial landlords are likely to be squeezed between tenants who are not paying rent and lenders who insist upon loan payments.

Some commercial landlords are likely to be squeezed between tenants who are not paying rent and lenders who insist upon loan payments.

(credit: iStockphoto)

My purpose here is to examine some of the effects of COVID -19 on the real estate industry and the lawyers who work within it. Many of the ideas expressed here did not originate from me. I serve as a moderator for an internet listserve for real estate lawyers called DIRT and have the benefit of many intelligent and thoughtful comments from its members.

The Takings Clause

In many American states, and some cities, governors and mayors have ordered the closure of businesses that serve large groups of the public, such as restaurants, bars, and entertainment venues. Although the legal authority underlying these executive orders has been doubtful in many cases, they have been widely complied with. A significant number of these businesses will probably fail and never reopen. The question arises whether their owners might be entitled to compensation for government takings under the Fifth and Fourteenth Amendments.

However, American courts have been extremely reluctant to impose a duty of compensation on government bodies that damage or destroy private property to address emergencies. A good illustration is the Florida Court of Appeals’s decision in Strickland v. Department of Agriculture, 922 So.2d 1022 (Fla. Ct. App. 2006). Strickland’s property had been damaged by firefighters who were fighting a series of wildfires in Florida in 1998. He sought compensation on the ground that a taking had occurred. In response, the court said:

Strickland claims that the trial court erred in ruling that the State was not liable under the Takings Clause of the United States and Florida Constitutions, for the trees, fencing and a dike that fire fighters damaged or destroyed to create a fire line on his property. However, it has long been established that the government’s destruction of private property to “prevent the spreading of a fire” is not a “taking in the constitutional sense.” E.g., Omnia Commercial Co., Inc. v. United States, 261 U.S. 502 (1923). Therefore, “[t]o prevent the spreading of fire, property may be destroyed without compensation to the owner.” Bowditch v. Boston, 101 U.S. 16 (1879); see also State Plant Bd. v. Smith, 110 So.2d 401, 406-07 (Fla. 1959) (“When, in the exercise of the police power, the State through its agents destroys ... [property] in the path of a conflagration, it is clear that the constitutional requirement of ‘just compensation’ does not compel the State to reimburse the owner whose property is destroyed.” ).

922 So.2d at 1023–24.

Indeed, the emergency may be simply an economic one. In Miller v. Schoene, 276 U.S. 272 (1928), the state of Virginia ordered ornamental red cedar trees growing on the plaintiffs’ property to be removed to prevent the spread of cedar rust disease to nearby apple orchards. The decision was driven by the importance of the apple business in that part of the state. The Court viewed the case as a choice by the state to save one type of tree at the expense of another. “When forced to such a choice the state does not exceed its constitutional powers by deciding upon the destruction of one class of property in order to save another which, in the judgment of the legislature, is of greater value to the public.” 276 U.S. at 279.

Although Miller was a Due Process case and did not involve a Takings claim, it vividly illustrates the attitude of the courts when property is destroyed to advance a more important goal. In light of this reasoning, obtaining compensation for the closing of a business to protect against COVID-19 infection seems like a very remote possibility. As outlined below, a variety of government programs may provide badly needed financial help to closed businesses, but they are not constitutionally required.

Mortgage Forbearance under the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), H. R. 748, 116th Cong., 2d Sess. (2020), which became law on March 27, 2020, authorizes residential borrowers with federally-backed mortgage loans, loans on one-to-four-family residences that are FHA-insured, VA-guaranteed, held or securitized by Fannie Mae or Freddie Mac, or made or insured by the Department of Agriculture, to request up to two 180-day forbearance periods on their loan payments. CARES Act § 4022. Borrowers need merely submit a request to their loan servicers, affirming that they are experiencing a financial hardship during and caused by the COVID-19 emergency. No additional documentation is necessary, and the servicer must grant the request.

It is unclear whether requests may be made only while the national emergency declaration is in effect. During the forbearance period, the statute’s intention is apparently that missed payments may be capitalized and added to the borrower’s loan balance, but no fees, penalties, or additional interest may be added. CARES Act § 4022(b)(3). The gaps in payments authorized by the Act may prove highly stressful to many servicers, who are usually obligated by their servicing agreements to make up payment defaults out of their reserves for several months. The Act imposes a 60-day moratorium, commencing on March 18, 2020, on the initiation of foreclosures and evictions under preexisting foreclosures of federally-backed loans. CARES Act § 4022(c)(2).

The CARES Act also makes a somewhat similar payment forbearance available to multifamily borrowers with federally-backed mortgages, although the period of forbearance is limited to 30 days plus two additional 30-day extensions. Requests must be made before the end of the federal emergency declaration, and in any event before December 31, 2020, and the borrower must have been current on mortgage payments as of February 1, 2020. During the forbearance period, the landlord may not evict or initiate eviction proceedings solely for a tenant’s nonpayment of rent or any rent-related fees or penalties.

Commercial Landlords and Tenants

One immediate result of the large number of business closures is that many commercial tenants are having difficulty paying their rent. The CARES Act provides no direct relief for such tenants. Several executive orders issued by governors and mayors have purported to impose moratoria on evictions that would extend to commercial tenants. Though the legal authority for these orders may in some cases be doubtful, they are likely to be complied with by judges and law enforcement officers, who will not be eager to be seen casting hapless tenants into the streets. In some states without gubernatorial executive orders, judges and sheriffs have issued their own orders on a patchwork basis.

Prohibiting evictions is in a sense a one-sided remedy and is based on the assumption that landlords are better able than tenants to absorb the economic losses involved. But this is an overgeneralization and in many cases is manifestly untrue. Not all commercial landlords are large firms with deep financial pockets. Many are “mom and pop” businesses or single-member LLCs who have no greater financial resources than their tenants. A moratorium on evictions may make sense temporarily, but in the long run, a more equitable division of losses is surely called for.

Moreover, most commercial landlords have mortgage loans, the debt service on which must be kept current to avoid foreclosure. The CARES Act provides no mortgage loan payment moratorium for them, or for multifamily residential landlords, unless their loans are federally-backed. Some commercial landlords are thus likely to be squeezed between tenants who are not paying rent and lenders who insist upon loan payments. The situation is complicated by the fact that many retail businesses that have been closed have leases that include percentage rent clauses, so that rent is automatically reduced when there are no walk-in customers and sales volume falls. In some states, governors have issued executive orders imposing moratoria on foreclosures.

PPP and EIDL Loans

The CARES Act creates a new Small Business Administration loan program, termed the Payroll Protection Program (PPP). CARES Act, Tit. I. PPP loans must be made before June 30, 2020. PPP is designed to provide a direct incentive for small businesses to keep their workers on the payroll. Loans are generally for 2.5 times the applicant’s average monthly payroll costs and may be as great as $10 million. SBA will forgive these loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. PPP loans are not available to most commercial landlords. See SBA Interim Final Rule, 13 CFR 120.110, excluding from the program “passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds.” Apparently condominium and other homeowners’ associations are also excluded by this language. The program may be helpful indirectly to landlords because commercial tenants can use PPP loan proceeds to pay their rent.

The CARES Act also modifies and broadens the preexisting SBA Economic Injury Disaster Loan (EIDL) program. See 13 C.F.R. § 123.300, CARES Act § 1110. These loans are available directly to landlords as well as other types of businesses. Under the expanded EIDL program, loans may be up to $2 million (based on actual economic injury), with terms of up to 30 years and an interest rate of 3.75 percent. Principal and interest payments are deferred for up to one year, and nonrepayable emergency grants of up to $10,000 are available. EIDL loan proceeds may be used by tenants to pay rent and by landlords to make mortgage payments.

Lease Restructuring

Tenants may try to bargain with the landlords for lease amendments that will ameliorate the burdens of paying rent for a shuttered business. A wide variety of lease modifications is possible, including partial or total rent abatement, rent deferral (in which rent may be omitted for several months, but must be made up by extra payments thereafter), and even early termination of leases. Because at this point no one knows how long the current crisis will last, or how long its economic effects will linger, there is likely to be intense negotiation between landlords and tenants concerning how long any rent abatement or deferral period will last.

Landlords must use great caution to obtain the necessary consents for any lease modifications to which they agree. Many mortgages on commercial real estate require lender approval for all material lease amendments. See, e.g., Forest Lake Facilities, LLC v. Wells Fargo Bank, N.A., 2017 WL 5633095 (D. Minn. 2017) (lender’s refusal to consent to lease amendment, even if wrongful, did not excuse borrower’s duty to make balloon payment). Likewise, existing subordination, nondisturbance, and attornment agreements often require lender consent to lease amendments, particularly if they involve rent reductions. See Alan Robin, Lenders and Leases and the Evolving Use of Subordination, Nondisturbance and Attornment Agreements, ALI-ABA Course of Study on Commercial Real Estate Leases, June 3, 1999. If the lease is, in fact, a sublease, consent of the master landlord will usually be needed. Finally, if the lease is supplemented by a guaranty, the consent of the guarantors will be necessary to protect against the possibility of their being discharged by lease modification under suretyship principles. See Modern Woodmen of Am. v. Ahold, No. 5:15-CV-243(MTT), 2016 WL 393995 (M.D. Ga. Feb. 1, 2016).

Force Majeure Clauses

Commercial leases often include force majeure clauses, which provide for the postponement or suspension of performance of certain of a party’s duties because an unforeseeable circumstance beyond the control of a party prevents or delays that party’s performance. These clauses are usually asserted when weather or other natural events prevent a landlord’s timely delivery of possession to a tenant. Though they may apply to benefit both landlords and tenants, there are many barriers to a tenant’s effective use of such a clause in the COVID-19 context.

First, is the pandemic the sort of Act of God covered by the clause? Events typically covered include tornadoes, floods, hurricanes, unavailability of utility service, riots, war, labor strikes, and the like. Second, there is a question of causation: does the tenant’s inability to perform result from the pandemic itself or the government’s order shutting down the business? Third, what remedies are available to the tenant? Force majeure clauses commonly do not excuse monetary obligations and may or may not permit termination of the lease. For all of these reasons, a close reading of the clause is necessary and may prove disappointing to the tenant.

Business Interruption Insurance

Many commercial tenants are required by their leases to carry business interruption insurance. This form of insurance is usually sold as an add-on to casualty insurance policies and generally covers only interruptions resulting from “physical loss or damage,” such as a fire, tornado, or another natural disaster. Could the impact of the COVID-19 virus in closing a business be considered a “physical loss or damage?” Two situations must be distinguished. If the closure occurs because a person who works or does business in the building has tested positive for the virus or has been diagnosed with the disease, it is likely that the “physical loss or damage” definition has been satisfied. It is fairly clear that this phrase does not require structural damage; contamination due to releases of bacteria, chemicals, or odors has sometimes been held within the definition, and a pathogen such as COVID-19 seems similar enough. Motorists Mutual Ins. Co. v. Hardinger, 131 Fed. App’x 823 (3d Cir. 2005) (bacterial contamination of water supply); Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-CV-0418 WHW, 2014 WL 6675934 (D. N.J. Nov. 25, 2014) (release of ammonia gas); TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699 (E.D. Va. 2010), aff’d, 504 F. App’x 251 (4th Cir. 2013) (toxic gas released by drywall); Mellin v. Northern Sec. Ins. Co., 167 N.H. 544, 115 A.3d 799 (2015) (odor of cat urine); Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (1968) (odor from gasoline spill). On the other hand, mold contamination has been held not to be physical loss or damage. See Universal Image Prod., Inc. v. Fed. Ins. Co., 475 Fed. App’x 569 (6th Cir. 2012).

The second situation, if the closure is ordered by a government agency as part of a general program of “social distancing” rather than because of a particular case of infection in the building, coverage based on “physical loss or damage” seems much more difficult to justify. Some policies specifically cover interruptions resulting from government action, and, in that event, closures ordered by state or local government because of COVID-19 may be covered. Other policies may lack this coverage and indeed may expressly exclude coverage resulting from a virus, contagious disease, or bacteria. Policies must be read with care.

There has been considerable discussion of statutes or regulations that would require insurers to cover losses from COVID-19-based closures, even if their policies do not extend this far. However, unless the relevant government agency also reimburses insurers for their payouts, it seems likely that existing insurance reserves could easily be overwhelmed by such a mandate. Also, government action of this sort would likely be found to violate the Contract Clause of the federal constitution and similar state constitutional provisions if no reimbursement to the insurance carrier were provided.

Remote Notarization

The COVID crisis has focused renewed attention on the concept of notarizations by audio or video link, given the reluctance of many people to acknowledge their signatures personally before a notary, as has traditionally been required. By the beginning of 2020, about half the states had amended their statutes to permit remote notarization, and a bill currently pending on Congress would adopt the concept nationwide if enacted. See 52 No. 22 Mortgage & Real Estate Executives Report NL 2 (15 Jan. 2020) (available on Westlaw); Securing and Enabling Commerce Using Remote and Electronic (SECURE) Notarization Act of 2020, S. 3533, 116th Congress, 2d Sess. The bill is endorsed by the American Land Title Association, Mortgage Bankers Association, and the National Association of Realtors. In the flurry of executive orders issued during the COVID crisis, many state governors have purported to authorize remote notarization. See COVID-19: Emergency Remote Online Notarization State Chart, Practical Law Real Estate (available on Westlaw). Several of these orders, however, appear to be beyond the authority of the governors issuing them. See, e.g., Missouri Governor, Executive Order 20-08 (6 Apr. 2020). If a governor has no apparent power to change statutory requirements, lenders and title insurers are faced with a dilemma whether to accept the changes at face value or to wait for action from their state legislatures.


The real estate industry is only one of many sectors of the American economy that has been seriously jeopardized by the COVID-19 crisis. Although many of the remedies outlined above are imperfect and fragmentary, it is in a sense remarkable how quickly and comprehensively US legal institutions have responded to the crisis.


By Dale A. Whitman

Dale A. Whitman is the James E. Campbell Missouri Endowed Professor of Law Emeritus at the University of Missouri in Columbia, Missouri.