Minimizing the Impact of COVID-19 in Commercial Lease Obligations

By Dana Delman and John Vukmanovic

Published in Western Real Estate Business

Widespread job loss and business disruption are plaguing the U.S. due to the impact of COVID-19, and in response, state and local governments have passed emergency orders and regulations temporarily prohibiting evictions and extending deadlines to pay rent, among other restrictions.

Landlords and tenants should be aware that eviction moratoria and related restrictions differ across states, counties, cities and regions. City and local jurisdictions tend to follow their state’s guidelines, but they may modify based on local conditions, which can be impacted by politics and lobbying. The first step is to know and understand the requirements in your local jurisdiction. If your jurisdiction doesn’t have these protective measures, contact your local politicians or nonprofit lobbying groups to see if you can get helpful legislation passed. 

TENANT OBLIGATIONS

While tenants are being protected in some jurisdictions, they are not absolved from paying rent. The new laws and ordinances only provide interim protections against eviction due to nonpayment of rent that is caused by COVID-19. Circumstances in Los Angeles, for example, that would excuse a commercial tenant include loss of business income due to a COVID-19 related closure, childcare expenditures due to school closures, healthcare expenses related to being ill or caring for a family member who is ill with COVID-19.

Depending on the jurisdiction, the tenant may have to notify the landlord in writing before the rent is due, or within a reasonable period afterwards, that the tenant needs to delay payment of all or a portion of the rent because of an inability to pay due to reasons associated with COVID-19. Tenants may not be protected if they do not provide the requisite notice or proof as each new law requires. 

Tenants should also be aware of any caveats or exceptions. For example, while some jurisdictions continue to provide eviction protection to most commercial tenants affected by COVID-19, they may exclude protection for large multi-national companies, publicly traded companies, companies with over $25 million in annual gross receipts, and/or companies that employ more than 500 employees. Check governmental entity websites often for updates.

LANDLORD OBLIGATIONS

Rarely do leases shift the financial burden of the pandemic shutdown to the landlord, and similarly, most insurance policies are not insuring tenants against pandemic closures. While lease burdens will not fall on the landlord, many will be negatively impacted due to evictions, vacancies and the probability of a more competitive rental market and tenant insolvencies. 

As discussed above, the good news for landlords is that unless the lease abates rent due to pandemic shutdowns, all rent must be paid. That doesn’t change any hardship a landlord may experience from delayed payment, or the relative certainty that many tenants are now, or will soon be, insolvent and eventually evicted after not paying rent. There could then be a surplus of available lease space, which will drive down rental rates. At this stage, landlords must be patient, while at the same time proactive and diligent. As an initial matter, familiarity with local ordinances is critical. This will provide guidance, and perhaps immediate steps to take (i.e., required written notices to tenants). Some ordinances may require that the landlord advise its tenant of the enactment of the ordinance itself, as well as its requirements. Other laws include language prohibiting a landlord from deceiving a tenant in connection with their rights and obligations under the eviction moratorium. 

When the moratoria are lifted, landlords will have the ability to file and resume prosecuting unlawful detainer (UD) actions seeking eviction of problematic tenants. In order to prevail, a tenant may be required to provide documentation to establish the inability to pay, and a direct connection to the virus, as part of their defense. Therefore, while the various moratoria may provide an opportunity for negotiating for delayed payment of rent, or payment of reduced rent to be made up at a later date, tenants will not be able to successfully argue a break from rent altogether. However, landlords should keep in mind that eviction actions may be delayed because the courts have been closed for several weeks and upon reopening, will have both a backlog of cases and likely hundreds, if not thousands, of new UD actions. This consideration should be factored into any lease negotiations. 

COMMERCIAL LEASE MODIFICATIONS

Many leases include a “force majeure” provision, which refers to events outside of the parties’ control, such as natural disasters, terrorist acts or war. If such a force majeure event occurs during the lease term, a tenant may be entitled to rent abatement or a specified rent reduction during the relevant time period. It is likely the courts will soon be entertaining landlord lawsuits stemming from the nonpayment of rents, and in turn, tenants raising a force majeure defense related to COVID-19.  It will be up to the courts or, if applicable, arbitrator, to determine if the COVID-19 pandemic qualifies as a force majeure event under each particular lease, and if so, whether all or part of such unpaid rents were excused. If the lease doesn’t require it, mediation might be a good solution to working out lease modification terms.

Additional considerations for commercial leases, include:

Operating Expenses Related to Upgraded Cleaning/Safety Measures: Depending on the industry, operating expenses related to upgraded cleaning and safety measures pursuant to COVID-19 may rise dramatically. First and foremost, the current regimen and physical property characteristics must be assessed. From there, reprioritizing the location’s needs and establishing standard operating procedures – perhaps even across departments – will be necessary. Hospitality or other high contact environments may necessitate rigorous deep cleaning and disinfection protocols to mitigate risk. Undoubtedly, this will also entail costs related to training of employees and/or workforce teams to ensure best practices and compliance. Landlords and tenants should address responsibilities and costs accordingly in lease modifications.

Business Interruption Policies and Claim Denials: Many companies have business interruption coverage as part of their commercial property and casualty insurance. Of note, especially as it relates to COVID-19, is that these policies may require a direct physical loss or damage to property for coverage to apply. In addition, due to the SARS epidemic in 2002-2003, many insurers have added specific exclusions in their all-risk policies for pandemics, epidemics and viruses. Some policies have exclusions for loss of use or business income due to governmental orders. Business interruption insurance is not likely to help in this situation.

Electronic Signatures: The shelter-at-home orders for most have essentially forced the use of e-signatures for commercial lease agreements during this time, and this is a practice that should continue. Parties to an agreement can sign anytime and anywhere, which in turn leads to considerable time savings and a quick turnaround. Aside from cost savings, security is also enhanced. With the rise of cybercrime, e-signature platforms typically employ added measures to ensure that data is transmitted securely over the internet. 

Regardless of what a landlord and tenant agree on moving forward, the key to modifying a lease is to document everything in writing, even if only in a confirming email or text. Ideally, all lease modifications should be in writing that both parties sign, and certainly if the original lease requires it.

LANDLORDS AND TENANTS WORKING TOGETHER

It’s imperative that commercial landlords and tenants explore options now to minimize risk and losses on both sides. Parties should be proactive and cooperative in strategizing solutions to minimize financial ruin. Tenants should be transparent and forthcoming with information that the landlord should consider in deciding on lease modification requests and terms. Ideally, landlords will be empathetic and cooperative. But whether you are a landlord or a tenant, the first step in the negotiation process is to know the laws that apply to you and make sure you meet the requirements.

Questions about negotiating a commercial lease? Contact Delman Vukmanovic LLP at 213.943.1340 (LA) and 949.852.3590 (OC) or info@DelVukLaw.com.

Preventing Corporate Divorce: Why You Need a Business Prenup

By Dana Delman, Esq.

Published in Businessing

Like domestic marriages, business partnerships can start off well, but over time and for a variety of reasons, the parties involved may choose to go their separate ways. This “corporate divorce” typically involves complex financial interests and more often than not, strong emotions.

Whether you’re going into business with a spouse, family members, friends or colleagues, it’s critical to treat the situation as you would any professional contract or agreement and get everything in writing upfront. Just because you get along with someone personally doesn’t mean you’ll have a successful working relationship.

There are ways to spot early warning signs and precautions to take to prevent your partnership from failing. If you’ve prepared yourself, and your partnership does begin to fall apart, you’re not caught in a lengthy and costly legal battle. Below are a few key methods to avoid a complicated corporate divorce.

Impact of Boilerplate Language in Corporate Governance Documents

If you’re drafting a shareholder agreement, bylaws, or operating agreement, you need to consider:

What kind of dispute resolution are you going to have in place?

For example, do you want to designate a third person to be a tiebreaker? If you end up going to court or arbitration, it will be much more costly. In some instances, it may be beneficial to go the more expensive route (arbitration or litigation) because then you’re not relying on one person (the third party) to be the ultimate decision-maker.

If you’re in a contentious, emotionally charged dispute, and one person has more money than the other, they can essentially get their way because they have the means to enforce their position. You could lose simply by not having the resources to fight for your position. Be aware of your partner’s financial resources from the outset because these resources can be used against you. They can control everything by virtue of having more money, even if they own the same percentage of the company.

Do you want to designate a trusted third person to break the tie?

There are obvious benefits and drawbacks of using a third party to break a tie. You have to be sure you can trust the third person since they will make the final decision, and you’re stuck with whatever they decide. Finding that person can be a challenge. Some choose a friend that’s also a lawyer; others choose a religious figure such as a pastor or rabbi – just be careful who you choose. Ideally, you have three members of the board of directors or managers so there’s never a tiebreaker issue.

Do you want to include a prevailing party attorneys’ fees clause?

Attorneys’ fee clauses can change the dynamic of a dispute because there’s a lot more at stake when the loser risks paying the winner’s attorneys’ fees and costs. Once again, if your partner has greater means to litigate a matter, you may lose simply because you don’t have the same amount of resources to put forth. You may end up paying more in the end. However, the existence of an attorneys’ fee provision may help you to convince a lawyer to wage the fight on your behalf.

Importance of Understanding Corporate Governance

There can be big problems down the road if you don’t stay current with your corporate governance. If you are a corporation and are not holding board meetings or regularly voting, make sure the corporation is designated a close corporation. If not, you could have issues because there are greater legal requirements on a yearly basis to keep your corporation up to date.

If you don’t follow those formalities, your partner could use that against you. If you don’t want to follow all of the corporate formalities, obtain the correct designation in order to avoid this. Perhaps most importantly, even if you have unanimous consent on everything, be sure to document everything. If you’re selling shares for example, be sure there is proper documentation of the deal terms and that corporate formalities are followed.

Be aware that if you are co-managers in an LLC, either manager can make decisions and the LLC is bound by those decisions. Right off the bat, each manager has full decision-making power and this can be very problematic.

Even if the operating agreement requires a unanimous decision– and without it the company can’t do anything– this doesn’t fully protect you against third parties seeking to enforce an agreement your co-manager made without your knowledge. The company is still on the hook for a co-manager’s bad decision or breach of fiduciary duty.

It’s also dangerous to get into an LLC and not have an operating agreement because states have default statutory schemes that apply to limited liability companies (LLCs).  Those laws may not be helpful to you and won’t always protect you in certain situations. Depending on the ownership percentages, your partner could change the entire structure and ownership of the company without your input. Sometimes it requires only a majority vote and with that, your partner can take a lot of control and make decisions you may not agree with.

Using LegalZoom Versus an Attorney

Understandably, most would like to save money when it comes to setting up and operating their business. Therefore, it’s tempting to turn to options such as LegalZoom, which appear to offer legal documents that can put everything in place at minimal cost. If everything goes according to plan, you may be fine in the long run, but issues can pop up when there is a dispute.

For example, you have an idea for the next big app, but you don’t have the technical knowledge to get it off the ground, so you turn to your brother’s friend who is a tech guru—except he doesn’t perform the work. Without the appropriate corporate governance documents in order, you could lose ownership of the idea. Your brother’s friend could become a co-owner in any future company that utilizes the idea.

By trying to save a few thousand dollars on LegalZoom’s off-the-shelf documents that aren’t tailored to your specific needs, your brilliant idea is now worth a lot less, or worse, nothing. Keep in mind that it doesn’t take an unscrupulous partner to result in a negative outcome. If your partner dies, you could end up being in a partnership with their spouse or heir, which could completely alter the dynamic of the company.

To save money and ensure you’re protected, ask your attorney for a template, and handle the first draft yourself. Then, have your attorney review it to make sure you’ve dotted your i’s and crossed your t’s. It’s important to remember that the wrong type of agreements won’t hold up in court (e.g., handshakes and email exchanges); you need to memorialize your agreements the right way.

Red Flags When Negotiating and Structuring Deals

When you’re in negotiations, it’s fine for the other party to say they’re not comfortable with something, but pay attention to what they’re not comfortable with. Is it bringing in a third party? This could signal the other person is trying to get control or be in a position to. Are they comfortable with a prevailing party attorneys’ fees clause? This could create a problem because it may show they can afford to litigate while you can’t. Your partner’s position on key boilerplate terms will tell you if they are being reasonable or trying to get the better of you by using the law as a weapon.

Consider negotiations of governance terms as part of the interview process. If something doesn’t feel right and nothing has been signed, you can still pull out. Don’t be afraid to walk away, even if you’ve invested money and resources, because it could be much worse if this happens further down the road. Consider conducting a background check even if you’ve known your potential partners for years. Most importantly, before you put money toward anything in the business, invest in getting agreements set up the right way.

Once you’ve decided to move forward, even if you’re passively involved, keep tabs on accounts until the company is making money and then you can consider loosening the reins. Get monthly statements. Don’t just assume your partner will perform their agreed portion of the work correctly or at all. The last thing you want to do is figure out how to get control back.

If you do go the route of hiring an attorney to handle your business matters, make sure they express real interest in your company and tailor everything to you. They should ask a lot of questions about the business and care about your success. You should feel like you can pick up the phone and ask them quick questions with a prompt response.

A final and somewhat obvious, but important, tip: If there is anything in the other person’s past that is questionable, even if they simply participated in it, they can and likely will do the same to you. Ask questions and trust your intuition.

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Delman Vukmanovic LLP has been recognized in the 2019 edition of Benchmark Litigation California, a guide to the state’s leading litigation firms and attorneys. Rankings are decided upon as a result of firm submissions, peer and client reviews gathered through a series of phone and in-person interviews, and independent study.

As noted by Benchmark in its editorial, “For a firm of its size, its reputation looms large among its devoted client base.” Further: One such client confirms, “The firm is very thorough. They took the time to understand the details of our case and involved us appropriately throughout the entire process. They are very proficient in the nuances of the law and the litigation process. There were never any surprises, no missed deadlines, and [the lawyers] were always prepared. Their business practices and billing processes were professional. Everything was well documented and timely. The firm was flexible with payment terms, and I would give them an A+ for their customer service attitude. I always felt that they were proactive in looking out for our best interest – not just in matters pertaining to the case, but in helping us grow our business.” Another client observes, “What I saw was persistence and expertise in getting the best outcome for their client.”

Additionally, partners Dana Delman and John Vukmanovic were selected as “State Litigation Stars,” a list that reflects only those individuals who were recommended consistently as reputable and effective litigators by clients and peers. Ms. Delman was recognized in the areas of: General Commercial, Intellectual Property, Media and Entertainment; and Mr. Vukmanovic was recognized in the areas of General Commercial, Intellectual Property, Media and Entertainment and Real Estate.

As published by Benchmark:

John Vukmanovic, a noted “bulldog” litigator, is a particular favorite. One client attests, “The truth is that I’ve known John for close to 40 years and he is one of the most stand-up persons I know. I have no doubt about his trust and ethical standards he conducts himself with, and he has never steered me wrong in 17 years since he has been practicing law.”

Dana Delman is also a recipient of client acclaim. “Dana immersed herself in our case. She invested her personal time to understand us, our business, and our products, all of which proved instrumental in winning the case.”

Now in its 11^th year of publication, Benchmark Litigation exclusively covers the litigation and disputes market in North America, covering the US, Canada and Mexico. Firms cannot pay to be recommended for the guide.

View Delman Vukmanovic’s profile on Benchmark Litigation here.

Agree to Disagree: Resolving Property Disputes with a Partition Action

By John Vukmanovic, Esq.

Published in Development Magazine – NAIOP

A written agreement in place from the outset can avoid most potential problems.

Two brothers, Bill and Tom, inherited an apartment building from their parents. The older brother, Bill, took the reins and oversaw management and accounting – except accounting wasn’t his forte. Bill’s idea of accounting was using a pencil and paper, and over time he stopped sending statements to Tom. Eventually, Tom got fed up with the lack of communication but didn’t know what to do.

It’s common for family members or business partners to co-own residential and commercial property. Unfortunately, it’s also common for them to have a dispute over the property because of disagreements about long-term objectives, accounting, maintenance costs, renovations, mismanagement and much more. Such a dispute might be over the use or management of the property, or it might be an unrelated personal dispute in which co-owners want to go their separate ways. Whatever the cause, parties often reach a stalemate when trying to reach a resolution on their own.

Types of Partition Actions

Owners should be aware that they have a right to file a partition action, which requests that the court order the sale or division of the property. The courts employ two types of sales options: partitions in kind and partitions by sale. The judge has discretion regarding which to proceed with, but generally speaking, a sale is the more popular route. If one is dividing up land, such as farmland or a multi-acre lot, a partition in kind may be ordered. But a partition by sale is typically the outcome because physically splitting up an apartment building, for example, is impossible. In a sale, the entire asset is sold, and then the proceeds are divided according to what the court has ruled each party should receive.

This process sounds fairly straightforward except that myriad factors come into play when determining how to divide proceeds from the sale. In the opening example, the court will need to determine if Bill adequately managed the property and appropriately accounted for dozens of items, including the following:

• Rent. Did Bill account for all incoming rent? Was the property rented out at market value, or did he rent it at “mom-and-pop” rates?

• Mortgage and property taxes. What was paid out?

• Maintenance and renovations. Were updates made and how were they paid for? Did Bill pay out of his personal funds or the property funds? Have the renovations increased the property’s market value? If so, by how much?

• Cash collections. For example, did the property have a coin-operated laundry room? How much was Bill collecting, and was Tom’s portion distributed?

Because there is no statute of limitations for a partition (assuming one hasn’t waived it), the court will do what’s fair and assess records and information as far back as needed. Often, a designated expert such as an appraiser or forensic accountant will get involved to review records and determine values.

The Process

Here’s how a partition proceeds, step by step:

One party files a complaint – yes, a partition is considered a lawsuit. If a co-owner is uncooperative or nonresponsive, the complaint tends to get that co-owner’s attention.

Once the complaint is filed with the court, a lis pendens is recorded with the county recorder’s office and serves as notice of the litigation, placing a cloud on the title. Essentially, potential buyers, lenders and so on are notified of the dispute. A lis pendens also may prevent the defendant co-owner from selling or encumbering the property.

The lawsuit is served, and the other side typically has 30 days to respond.

The lawsuit may settle quickly, with the party being sued saying, “Happy to buy out the other side; let me arrange financing.” But the party suing can also say, “No thanks,” because that party wants to see what the other side has been up to.

If the suing party does turn down the buyout offer, the lawsuit moves into discovery, where an assessment is conducted to determine the status of the financials, including accounting records, receipts, invoices, property tax bills, leases, checks deposited and so on.

At some point, there may be a deposition if either party thinks it is necessary to gain further information or identify misconduct.

If a deeper dive is required, this is when accounting experts step in and conduct their own analysis. Depositions of those experts typically take place in the days or weeks approaching the trial.

Finally, the case goes to trial. Most California courts strive to get cases to trial within one year of the complaint’s filing. That being said, partition actions rarely go to trial because the costs associated with attorneys, court-appointed referees and other items do not justify it, especially when it’s already been determined who owes what to whom. If emotions take over, especially in heated family disputes, the process can of course drag out.

Avoiding Disputes

The key to avoiding a property dispute is communication. If one party generally oversees the property, that person needs to communicate with the other parties regularly.

The quality of the communication is also important. Being transparent by providing complete monthly statements, invoices, receipts, cancelled checks and so on goes a long way to reassure the other co-owners.

A written agreement in place from the outset can avoid most potential problems; unfortunately, written agreements in family settings are almost nonexistent. In all co-owned properties, parties should have an agreement that spells out objectives for the property and respective responsibilities.

View the original article.