MarchDarrell Clay 23, 2020

COVID-19 (coronavirus) has brought with it a virtual tidal wave of legal questions. An important one: may a tenant invoke a force majeure (French for “superior force”) clause to avoid paying rent to a landlord in the event of a government lockdown or quarantine? Unfortunately, the answer is, “it depends.” Interpretation and application of any contractual force majeure provision is highly dependent on the particular terms of the clause in question and the circumstances causing a disruption of normal business activities. Other contractual performance doctrines may come into play, such as impossibility of performance and frustration of purpose. Both doctrines refer to occurrences or causes beyond one’s control, and therefore without fault.

A threshold question is whether force majeure applies as a result of COVID-19/novel coronavirus. One recent article observes that “a force majeure clause could cover the COVID-19 pandemic if it includes specific public health-related language, such as ‘flu, epidemic, serious illness or plagues, disease, emergency or outbreak.’” “Acts of government” may also trigger force majeure, but absent other reference to such health-related events, the catch-all phrase “Acts of God” often included in a force majeure clause may not apply. As another article aptly puts it: “An ‘Act of God’ alone may be too broad to excuse a party from performance.” Most courts narrowly interpret force majeure clauses, and that level of strict scrutiny may pose a real challenge where the clause does not specifically mention something relating to public health events.

On the other hand, Ohio, like many other states, has public health laws that may be useful in establishing force majeure/impossibility/frustration. Ohio law provides that “The director of health shall investigate or make inquiry as to the cause of disease or illness, including contagious, infectious, epidemic, pandemic, or endemic conditions, and take prompt action to control and suppress it.” Another Ohio law prohibits any person from violating “any rule the director of health or department of health adopts or any order the director or department of health issues under this chapter to prevent a threat to the public caused by a pandemic, epidemic, or bioterrorism event.” Violation of an order of the Director of Health is punishable as a second-degree misdemeanor.

There are only a handful of reported cases that construe Ohio’s laws regarding orders by the Director of Health, and none deal with large-scale pandemic/epidemic events such as the COVID-19 virus. However, both the Ohio Governor and the Ohio Director of Health have issued an official Stay At Home” Order, mandating that all non-essential business and operations must cease, except for specifically-permitted Essential Businesses and Operations. Therefore, tenants who are not engaged in Essential Businesses and Operations seemingly may have a good argument that rent should be abated during the time period that this Order is in effect. There will undoubtedly be litigation over these issues in the months and years ahead because this Order has required the closure of numerous retail and service businesses, cutting off cash flow to these tenants and in turn compromising their ability to pay rent to their landlords.

At the same time, there is case law holding that these type of closure orders do not constitute force majeure so as to excuse a tenant’s performance under a lease. For example, in Aukema v. Chesapeake Appalachia, LLC, landowners brought an action seeking to declare that certain oil and gas leases had expired and were not extended by force majeure. Defendants argued that a state directive that placed a moratorium on hydraulic fracturing constituted force majeure that excused lack of actual performance, and thereby permitted automatic lease renewal (which was tied to actual drilling operations). The court rejected this argument, noting the state directive permitted alternative drilling operations that could have been performed by defendants so as to trigger automatic lease renewal. The court also rejected claims that the state directive frustrated the lease’s purposes, reasoning that the frustration doctrine requires an event that is unforeseeable, and the directive in question was foreseeable when the leases were “signed, renewed, and assigned.”

Another relevant case, though not involving a commercial lease, is Phelps v. School Dist. No. 109, Wayne County. There, the question was whether a school district had to make payments to a teacher who was under contract with the school board when her school was closed for two months “by order of the state board of health on account of the influenza epidemic . . . .” The trial court sided with her and awarded her $100, representing two months of pay. In upholding this judgment, the Supreme Court of Illinois observed that the move to close the building did not alter the rights of the parties to the contract. Therefore, it is prudent to require a provision in the contract that specifically exempts one from liability in the event of an epidemic or pandemic.

A more limited application of contractual frustration is seen in Colonial Operating Corp. v. Hannan Sales & Service. There, the parties entered into a lease under which the tenant was permitted to use the premises only for an automobile showroom. Five years after entering into the lease, the Office of Production Management of the United States issued a directive prohibiting the sale of model year 1942 automobiles or any automobiles that had been driven less than 1,000 miles. When the landlord sued to collect unpaid rent, the tenant claimed that the OPM order had frustrated the purpose of the lease, thereby discharging the tenant’s obligation to pay rent. The New York Supreme Court, Appellate Division, held that the trial court erred in finding that the lease’s essential purpose had been frustrated, relying on the fact that the OPM order did not completely “prohibit, ban or frustrate the sale of all automobiles in the demised premises.” Rather, the appellate court noted, the OPM directive still permitted sales of other automobiles, including sales to government entities and other various “eligible” parties. Further, the OPM directive did not prohibit the sale of “second-hand automobiles and automobile accessories . . . .” This case reinforces that there must be a fact-specific inquiry into how a government order specifically impacts the tenant’s operations of its leased premises.

Make no mistake: In Ohio alone, there will be hundreds of millions of dollars at stake on the issue of rent suspension due to the effects of COVID-19. Ohio tenants will have the “benefit” of the “Stay At Home” Order and other orders issued by the Governor and the Ohio Director of Health to bolster their arguments of force majeure, impossibility of performance, and frustration of purpose.

Based on the examples above, success may not be assured for tenants invoking these principles in defense of eviction and back-rent claims by landlords. Meanwhile, landlords must still make mortgage payments, pay insurance premiums, and incur operating expenses. One can envision a scenario in which both landlords and tenants become insolvent and are unable to pay debts in the ordinary course. Payments in response to claims under business or rent interruption insurance policies may have the potential to cover some of these cash flow gaps, but it is becoming fairly clear that insurers are taking the position that such policies do not cover claims arising from COVID-19 losses. (A bill was introduced and quickly withdrawn recently in New Jersey which would have compelled insurers to honor business and rent interruption claims due to COVID-19. Read about that here.) It would appear that only the federal government has the resources to craft a rescue of those impacted by the loss of rental income in this crisis.

Darrell A. Clay is a partner at  Walter | Haverfield who focuses his practice on labor and employment and litigation. He can be reached at dclay@walterhav.com or at 216.928.2896.

Jack Waldeck is a partner at  Walter | Haverfield  and the chair of the real estate team. He can be reached at jwaldeck@walterhav.com or at 216.928.2914.

Rick AmburgyUpdated: April 6, 2020

Ohio’s “Stay At Home” Order, which lasts until Friday, May 1, 2020, has shut down all Ohio non-essential businesses in a further attempt to control the spread of COVID-19 (coronavirus).  What does this mean for Ohio’s owners, design professionals, contractors, subcontractors, and suppliers?  First, most construction in Ohio is not shutting down, but businesses that choose to remain open must implement the necessary steps to ensure the safety of employees, contractors, and other invitees to the project site.

Section 9 of the Order identifies “Essential Infrastructure” as an exemption to shutting down non-essential businesses. Specifically, “individuals may leave their residence to provide any services or perform any work necessary to offer, provision, operate, maintain and repair Essential Infrastructure.” This includes, among other things, general construction, construction required in response to this public health emergency, hospital construction, construction of long-term care facilities, public works construction, school construction, essential business construction, and housing construction.  The Order also states that the Essential Infrastructure exemption “shall be construed broadly to avoid any impacts to essential infrastructure” as the same may be “broadly defined.” Further, the Order includes critical trades as Essential Businesses and Operations, which include, among others, building and construction tradesmen and tradeswomen, plumbers, electricians, operating engineers, HVAC contractors, and painters.

Owners, design professionals, contractors, subcontractors, and suppliers who choose to continue construction operations during the shutdown must proceed with caution.  Safety measures must be both documented and implemented in order to protect against the spread of COVID-19. Where possible, remote and virtual work as well as meeting capabilities must be utilized, and all parties must continue to follow the recommendations of the Centers for Disease Control and Prevention (CDC), Occupational Safety and Health Administration (OSHA), and the Ohio Department of Health, which include, among other recommendations:

  • Social distancing of at least six feet between individuals performing work at the project site
  • Frequent disinfecting and cleaning of all surfaces and equipment
  • Keeping only the required staff necessary to perform the work in accordance with the project schedule
  • Discontinuing use of community drinks or food
  • Discouraging hand-shaking and other contact greetings
  • Instructing workers to clean their hands often with an alcohol-based hand sanitizer that contains at least 60-95% alcohol, or wash their hands with soap and water for at least 20 seconds. Soap and water should be used preferentially if hands are visibly dirty
  • Providing soap and water and/or alcohol-based hand sanitizers to workers
  • Discouraging congregation at lunch or breaks
  • Discouraging the sharing of tools
  • Prohibiting the sharing of personal protection equipment (PPE)
  • Utilizing disposable gloves where appropriate
  • Conducting routine environmental cleaning
  • Encouraging workers to take temperatures at each project site
  • Requiring any workers exhibiting any symptoms to leave the project site and/or to stay home if sick
  • Requiring respiratory etiquette, including covering coughs and sneezes
  • Maintaining records, updates, and communications in connection with the processes and procedures implemented to comply with the foregoing regulations

Each party should read and understand their construction agreement, especially those provisions relating to notification and documentation requirements and entitlements to additional time or monies.  The success of every project depends upon the prompt and transparent communication and cooperation among owners, contractors, subcontractors, design professionals, and suppliers.  Every party must work together to ensure the safety of the project and to address the potential time delays and costs associated with the ongoing fight against the spread of COVID-19.

Rick Amburgey is an associate at Walter | Haverfield who focuses his practice on construction law, financial services and commercial real estate. He can be reached at ramburgey@walterhav.com or at 216-619-7843.

Updated May 312, 2020 

If you are a Walter | Haverfield client who needs documents notarized, we are here to help. We are certified through the Ohio Secretary of State to notarize documents online for individuals in and outside the State of Ohio. No in-person meeting is necessary. Details on what is needed in order to participate in an online notary service as well as a description of the process are below.

Participant Requirements:

  • Access to the following: a computer, internet and webcam
  • Driver’s license or passport
  • Digital version of documents that need to be notarized
  • Must be a Walter | Haverfield client

E-Notary Process (takes about five minutes):

  • A link to join the e-notary process is sent to the participant
  • Once a participant clicks on the link, the e-notary software is launched online and a credential analysis begins
  • During the credential analysis process, the participant uploads his/her driver’s license or passport
  • The software analyzes the license/passport and asks a series of questions to verify one’s identity
  • An e-signature is adopted, and the Walter | Haverfield notary digitally applies the seal and signature to the document(s)
  • An email is then sent to the participant with a copy of the notarized documents

Ohio is one of 36 states that allows documents to be e-notarized. In Cuyahoga County, there are about two dozen e-notaries.

Please note that online notary services are not available for depositions.

We look forward to maintaining our strong working relationship with you during this time and keeping in close contact via phone, email or video conference. If you are a Walter | Haverfield client in need of our online notary service or have questions, please email us here. Individuals who are not Walter | Haverfield clients may visit sites like notarize.com.

 

Cam HillingMay 20, 2020 

The Federal Reserve (Fed) expects to launch its Main Street Lending Program by the beginning of June. The news comes after the Fed announced the formation of the program in early April and an expansion of it on April 30, 2020. The program’s goal is to get funds to small and medium-sized businesses, and its expansion allows a wider variety of lenders and borrowers to participate in the program.

The Main Street Lending Program now operates through three facilities: the Main Street New Loan Facility (“MSNLF”), the Main Street Expanded Loan Facility (“MSELF”), and the Main Street Priority Loan Facility (“MSPLF”).

You can apply for any of the Main Street loans by contacting an eligible lender. The eligible lenders are U.S. federally insured depository institutions (including a bank, savings association, or credit union), a U.S. branch or agency of a foreign bank, a U.S. bank holding company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization, or a U.S. subsidiary of any of the foregoing. After the application, eligible lenders will conduct an assessment of each potential borrower’s financial condition.

A business may only participate in one of the Main Street Facilities: the MSNLF, the MSELF, or the MSPLF. Further, a business is not eligible if it participates in the Primary Market Corporate Credit Facility (“PMCCF”) offered by the Fed. The PMCCF is a separate lending program that provides access to credit for investment-grade companies.

To be eligible to borrow through one of the Main Street Facilities, a business must meet all of the following requirements:

  • Domestic business established prior to March 13, 2020
  • Not an Ineligible Business, as defined by the Small Business Administration, including but not limited to
    • Non-Profits
    • Business primarily engaged in financial and lending services
    • Passive businesses
    • Life Insurance Companies
    • Casinos/Gambling
  • Meet one of the following two conditions: (i) has 15,000 employees or fewer, or (ii) had 2019 annual revenues of $5 billion or less
  • Has not received support under the sections of the CARES Act, which authorized up to $46 billion for direct Treasury support for passenger air carriers (and certain specified related businesses), cargo air carriers, and businesses critical to maintaining national security

Businesses that have received PPP loans are not precluded from eligibility. Below are some of the required features of the Main Street Facilities.

Key Features

  • 4 year maturity
  • Principal and interest payments deferred for one year
  • Adjustable rate of LIBOR (1 or 3 month) + 300 basis points
  • Prepayment without penalty

Specific Facility Features

Main Street New Loan Facility

  • Principal amortization of one-third at the end of the second year, one-third at the end of the third year, and one-third at maturity at the end of the fourth year
  • Minimum loan size of $500,000
  • Maximum loan size that is the lesser of (i) $25 million or (ii) an amount equal to four times the eligible borrower’s 2019 adjusted EBITDA plus the amount of any credit lines (whether drawn or undrawn)
  • At the time of origination, or at any time during the term, a MSNLF loan may not be contractually subordinated in terms of priority to another loan of the borrower

Main Street Expanded Loan Facility

  • Principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year
  • Minimum loan size of $10 million
  • Maximum loan size that is the lesser of (i) $200 million, (ii) 35% of the eligible borrower’s existing outstanding and undrawn available debt that is equal in priority with the eligible loan and is equal in secured status (i.e., secured or unsecured), or (iii) an amount equal to six times the eligible borrower’s 2019 adjusted EBITDA plus the amount of any credit lines (whether drawn or undrawn).

Main Street Priority Loan Facility

  • Principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year
  • Minimum loan size of $500,000
  • Maximum loan size that is the lesser of (i) $25 million or (ii) an amount equal to six times the eligible borrower’s 2019 adjusted EBITDA plus the amount of any credit lines (whether drawn or undrawn).
  • At the time of origination and at all times the eligible loan is outstanding, the eligible loan is senior to or equal with, in terms of priority and security, the eligible borrower’s other loans or debt instruments, other than mortgage debt.

For more information on the Main Street Lending Program, including required covenants and certifications, please visit the Federal Reserve’s Main Street Lending Program page here or reach out to a professional at Walter | Haverfield here.

Cameron Hilling in an associate at Walter | Haverfield who focuses his practice on real estate law. He can be reached at chilling@walterhav.com or at 216.658.6217.

Cam Hilling

April 7, 2020

Ohio Governor Mike DeWine signed Executive Order 2020-08D on April 1, 2020, which addresses commercial evictions and foreclosures in Ohio during the COVID-19 crisis. The purpose of the Order is to provide relief to small business tenants and commercial real estate borrowers who may be feeling the economic impacts of the COVID-19 pandemic.

The fact that this is an Executive Order is a bit misleading. The Order contains requests rather than demands. Governor DeWine wishes to combat the potential destabilizing impact commercial evictions and foreclosures could have on local economies during Ohio’s Stay at Home Order. Executive Order 2020-08D applies to commercial tenants and borrowers who face “financial hardship due to the COVID-19 pandemic” and contains the following requests:

  • Landlords are requested to suspend rent payments for small business commercial tenants in the State of Ohio who are facing financial hardship due to the COVID-19 pandemic for at least ninety (90) consecutive days.
  • Landlords are requested to provide for a moratorium of evictions of small business commercial tenants for a term of at least ninety (90) consecutive days.
  • Lenders are requested to provide commercial real estate borrowers, who have a commercial mortgage loan for a property in Ohio, an opportunity for a forbearance term of at least ninety (90) consecutive days for said mortgage as a result of financial hardship due to the COVID-19 pandemic.

The Order explicitly states that it shall not do any of the following:

  • Negate the obligation of a small business commercial tenant to pay rent.
  • Relieve a commercial real estate borrower of its obligations to make loan payment.
  • Suspend any state or federal law.

Because the actions contained in the Order are requests rather than demands, there are no penalty provisions for failure to abide by the Order. The Order remains in effect through July 1, 2020, unless modified or rescinded by Governor DeWine prior to that date.

Governor DeWine and Lieutenant Governor Jon Husted have continually stated during their daily press briefings that the intent of Executive Order 2020-08D is to encourage lenders to work with borrowers and in turn, landlords work with tenants, to reach equitable payment options and temporary solutions during the COVID-19 pandemic. Any tenant or borrower who is currently facing financial hardships due to the COVID-19 pandemic should request assistance from their landlord or lender.

Governor DeWine previously signed House Bill 197 (HB 197), which tolls numerous temporal deadlines set to expire between March 9, 2020 and July 30, 2020. The tolling order may allow landlords and lenders to delay action that otherwise would have been required during this time by the Ohio Rules of Civil Procedure.

Cameron Hilling is an associate at Walter | Haverfield who focuses his practice on real estate. He can be reached at chilling@walterhav.com or at 216-658-6217.