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By: Philip J. Kaplan
To prevent the spread of Covid-19, state and local governments are restricting business operations that depend on large gatherings of people. Minnesota Governor Tim Walz has issued an executive order closing bars and restaurants (except for takeout service) throughout Minnesota. Minneapolis Mayor Jacob Frey has made a similar emergency declaration for the city. It is unclear when the restrictions will be lifted.
Even a temporary closure of bars and restaurants will be economically devastating. At a time when bars and restaurants have limited or no ability to generate revenue, their expenses will continue to mount. Among other costs, many bars and restaurants lease their spaces and pay thousands – even tens of thousands – of dollars per month in rent. During and after the shutdown, a lot of these businesses will be unable to meet the payment obligations in their leases.
As they manage the Covid-19 crisis, bar and restaurant tenants and their landlords should take all of the following steps:
Check Insurance Coverage
Every bar and restaurant that has been closed during the Covid-19 pandemic should immediately check its insurance coverage. Landlords should ask their bar and restaurant tenants about insurance as well. Does the tenant have business interruption insurance or any other type of policy that might apply?
Is the landlord named as an additional insured? What types of losses are covered? What are the policy limits? What does the policyholder need to do to preserve its insurance claims?
Review the Lease
Bar and restaurant tenants and their landlords should also review their lease agreements. The Covid-19 emergency is so unique that it is hard to imagine a lease provision speaking to this specific situation. But it is possible that some general lease provisions will govern.
Did either the landlord or the tenant explicitly or implicitly assume the risk of an unanticipated catastrophe? Does the lease have a force majeure clause? Does the lease have a “go dark” clause? Does the lease say anything about what the parties are allowed or required do if the government restricts the tenant’s ability to use the premises as intended?
Consider Legal Defenses
Assuming the lease agreement does not clearly define the tenant’s rights and obligations in light of Covid-19, both the landlord and the tenant should consider whether the tenant has any legal excuses for non-payment of rent.
Minnesota courts recognize defenses of impracticability and frustration of purpose, which provide relief from contractual obligations under certain circumstances. Impracticability applies when an unforeseen event negates a basic assumption underlying the contract and makes it impracticable for a party to perform. Similarly, frustration of purpose applies when an unforeseen event defeats both a basic assumption underlying the contract and one party’s primary purpose for entering into the agreement. The main difference between the defenses is that frustration of purpose does not depend on the parties’ practical ability to perform. In other words, a party may be relieved of its contractual duties due to frustration of purpose even if it could find a way to satisfy its obligations. Impracticability or frustration of purpose can be permanent or temporary, complete or partial.
Government-mandated business closures, wars, and significant safety fears have supported such defenses in the past.
Although the case law provides some loose analogies to our current situation, the availability of legal excuses for bar and restaurant tenants will be fact-specific. Is the tenant’s business completely closed or is it open for takeout? How significant is the tenant’s takeout business? Is the tenant experiencing a shortage in product supply? How long will the government restrictions last? Will the tenant’s business be in a position to operate once the government restrictions end? Even if the tenant can legally operate, will it remain closed for a period due to safety or health concerns?
In an ideal world, businesses will work through the Covid-19 crisis together and find ways to soften the economic blow that everyone is feeling. But some will not be able to find common ground, making litigation inevitable. Bar and restaurant tenants and their landlords should hope for the best and prepare for the worst.
Phil Kaplan is a business litigator at Anthony Ostlund Baer & Louwagie P.A. Phil primarily focuses on commercial real estate and shareholder/partnership disputes. In the real estate field, Phil has represented commercial landlords and tenants in a variety of breach-of-lease cases, including a number of cases involving bars and restaurants.