COVID-19 and the Impact to Commercial Real Estate in South Carolina

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Many of our commercial real estate clients are asking for guidance about the ramifications of COVID-19 (the coronavirus disease) and the impact on their business. This summary is meant to address some of the general issues that COVID-19 may have on the commercial real estate sector in the State of South Carolina.

A few important caveats. This Memorandum is meant to provide general guidance only. It is not a legal opinion or intended to address any particular situation. Each circumstance and contract is different and must be analyzed independently. This document only addresses possible commercial real estate impacts within the State of South Carolina. We encourage you to seek specific legal advice regarding the impact of COVID-19 on your business.

LEASE PROVISIONS:

We have undertaken a review of multiple office, retail and industrial leases and contracts in the past few days. As a general rule, we are finding that landlord “form” leases generally contain favorable force majeure language that applies as a blanket condition to all obligations set forth in the lease. That said, we have found several tenant “form” leases that limit events of force majeure to a set number of days for specific circumstances and a few that do not allow the application of force majeure to certain landlord construction obligations. Other tenant “forms” contain language requiring the landlord to provide written notice to the tenant of any matter of force majeure before the delay clock for force majeure will begin. We encourage the readers of this Memorandum to review the force majeure language in all of their respective leases.

FORCE MAJEURE:

As an initial matter, commercial landlord-tenant case law, and pandemic/epidemic circumstances for that matter, are limited in South Carolina. As such, we have little insight into how a court may rule on such a dispute relating to the current COVID-19 pandemic.

With respect to “force majeure”, it is has generally been defined in South Carolina (SC Code §38-59-210 (2012)) to mean “any act of God, governmental act, act of terrorism, war, fire, flood, earthquake, hurricane, or other natural disaster, explosion or civil commotion,” but a court will typically interpret the language as written in a contract (or lease in this context). Contrast this to other states, like Georgia, where there is a specific statutory “act of God” defense to a breach of contract action (O.C.G.A. § 13-4-21), where the critical question will be whether a pandemic-type scenario would be classified under such statutory term in the context of a contractual dispute. It is likely that until the South Carolina Supreme Court provides clarity (or the South Carolina State House does so via legislation), the unique provisions and wording of such clauses, the facts at issue in particular cases, and the variability of judicial interpretation will render this uncertain territory for businesses. It is instructive that the definition in the South Carolina Code, while not specific to lease or contract disputes, does include non-natural type of events (i.e terrorism, governmental act, civil commotion) which may further open the door for a court to hold that the pandemic is an applicable event, since it may not be readily identifiable as a “natural” disaster, and particularly if it leads to a tenant being forced to close by municipal order.

That said, a recent South Carolina contract dispute case has provided some insight into how a court would rule on a defense relating to force majeure, by noting that a “party to a contract must perform its obligations under the contract unless its performance is rendered impossible by an act of God, the law, or by a third party regardless of the probability or responsibility for such performance, unless “it “cannot by any means be accomplished, it is not considered impossible”(as opposed to commercial impracticability).[1] The same case also considered the duty to mitigate as a factor in considering damages, providing that the injured party has a duty to make reasonable efforts to minimize the damages incurred (so that it cannot make a claim for damages that were avoidable by the use of “reasonable care and diligence” [but not “unreasonable exertion or substantial expense”]).[2]

Based on the foregoing, it would seem that under the current circumstances, tenants seeking relief in South Carolina would have a firm ground to stand on, and thus would make the individual language of the leases of the utmost importance, and further that landlords should take reasonable steps to mitigate as may be feasible. Also, note that if there is an express list of circumstances in the document in question that would constitute a force majeure event, but that is not a complete list, a court will likely only apply the clause to events similar to those already listed under the legal principle of ejusdem generis, which states that when a limited list of specific things also includes a more general class, that the intent can be inferred that the scope of that more general class is to be limited to other items more like the specific items in the list. Most leases will have an express carve out that a force majeure event will not excuse any monetary obligation, and there is no express statute or case law in South Carolina that would indicate such a clause as problematic.

We recommend all readers to consider including language related to “pandemics, epidemics, viral outbreaks” as part of their force majeure language in all future documents.

CONDEMNATION, EMINENT DOMAIN OR INABILITY TO OPERATE:

Some tenants may also rely on the condemnation or eminent domain lease provisions, due to the fact that a governmental authority ordered closure may prohibit a tenant from operating. While there is no case law on whether a closure in this scenario could be classified as such, the Eminent Domain Act (2006) prohibits “the State [of South Carolina] or a local government” from “condemning, or taking, private property for any purpose except for a public use.” This could lead to a rebuttal that any pandemic-related forced (or recommended) closure would be for the purpose of public safety or well-being, as opposed to public use. Another consideration is that most commercial leases require the tenant to operate in compliance with all applicable laws, ordinances, and governmental requirements, which, in the context of an ordered closure would require them to cease operations (or at least severely limit).

CO-TENANCY:

Landlords and tenants could also utilize this opportunity to use force majeure clauses proactively. For example, a landlord may claim force majeure clauses excuse co-tenancy requirements (opening, ongoing, or otherwise) and other obligations to its tenants and a tenant may claim force majeure clauses excuse continuous operations clauses to its landlord. Also, with respect to delivery dates and other critical lease dates, it is always a best practice (and even more so important now), to communicate early and often with respect to construction or permitting delays.

BUSINESS INTERRUPTION INSURANCE:

The current situation is a good time to review any relevant business interruption insurance, and in particular, any express exclusions from coverage. Is your business interruption coverage part of a standard policy or is it written as an endorsement to your coverage? Endorsements often provide broader coverage. Most standard policies pay for “direct, physical loss,” which generally means that you have suffered property damage which has led to loss of income and other revenues such as rent and utilities. Usually coverage is excluded for economic losses unless you can tie it to an actual business interruption caused by a fire, flooding or other casualty. Is the COVID-19 virus causing physical damage? The courts have not adopted a uniform rule but some say physical damage must render your property uninhabitable or unfit for its intended purpose.
So a standard policy may not offer coverage for COVID-19 but you should check with your insurance agent on the following:

Some policies written for health-related businesses and hospitality may include coverage for communicable and infectious diseases and may not require actual physical property damage.
A “public authority clause” would apply to loss of income which results from government’s order denying access to your property. This clause may kick in if you lose income because of limitations imposed by government in an attempt to stop the spread of diseases even if there is no physical loss.
If you have “pollution coverage,” you need to ask your insurance agent if COVID-19 could be determined to be a pollutant that is causing physical loss. COVID-19 could be deemed a permitted peril under your policy unless the policy specifically excludes such things as viruses, bacteria and other diseases.
Are you covered by a builder’s risk policy? This is a separate policy and covers casualties occurring to your building while under construction. Coverage under this policy could cover losses that you have incurred due to construction delays.

LOAN DOCUMENTS:

Most loan documents do not contain force majeure provisions as lenders expect to get repaid on time no matter the delay. Often times loan documents prohibit landlords from granting rent concessions or modifying leases without lender consent. We encourage all readers to consider the impact of such concessions in the context of what is required by their loan covenants. Loan documents that contain “material adverse change” provisions may also give lenders the ability to place a borrower or guarantor in default as a result of closures due to COVID-19. Many loan documents also require borrowers to notify the lender of material adverse changes to avoid being in default.

LEASE CONCESSIONS:

When permitted by the applicable loan documents, we have seen many clients grant lease concessions in the last week – especially to local tenants (as opposed to national tenants) and restaurant tenants. Most landlords that are granting concessions are requiring tenants to repay the concession amounts beginning on a date certain and over a three month period. We also encourage our landlord clients to consider including language stipulating the repayment of rent in the event that a tenant receives governmental assistance. We do not yet know the specifics of governmental intervention. That said, if the government provides a program to tenants for the payment of rent then the landlord should be the beneficiary of all or part of such concession. You may also want to consider including confidentiality provisions prohibiting either party from discussing the concession with third-parties.

CONTRACT CONCESSIONS:

Many clients are facing the impossibility of performance when it comes to closing. If you are under contract with a pending closing date, you may not be able to close because title cannot be updated given that the applicable county Register of Deeds (“ROD”) office is closed. Fortunately many ROD offices provide for electronic title updates and electronic recording. We are familiar with these procedures and ready to help you navigate electronic updates and recording wherever possible. We note that most title insurance companies are also taking blanket title exceptions for matters resulting from the pandemic. That said, some title companies are providing insurance when recording cannot occur through the use of gap indemnities and affirmative coverage. If you are unable to close, we can assist with contract modification language that delays closing until the pandemic has passed.

SOUTH CAROLINA SUPREME COURT ORDER 2020-03-18-01, RE: STATEWIDE EVICTIONS AND FORECLOSURES:

On March 18, 2020 The South Carolina Supreme Court issued Order 2020-03-18-01 (the “Order”) halting all foreclosures and evictions in South Carolina, “in recognition of the difficulties the COVID-19 pandemic may have on institutions and individuals, and on the basis that increased housing insecurity and homelessness will worsen the threat posed by the illness.”

Evictions:

Under the Order, all evictions currently ordered and scheduled are delayed until May 1, 2020 at the earliest. Further, the Order instructs lower courts not to accept any applications for eviction from landlords. Courts may not schedule eviction hearings, issue writs of ejectment, or “proceed in any other matter regarding evictions” until the Supreme Court orders otherwise. The Order does provide for exceptions to this rule “for matters that involve essential services and/or harm to person or property.” While it is likely the intent of the Supreme Court to protect vulnerable residential tenants during the COVID-19 crises, the Order appears to, at least on its face, also apply to commercial tenants. Therefore, it appears that commercial tenants occupying retail spaces, for example are also protected by Order 2020-03-18-01.

Foreclosures:

Similarly, the Order places a “moratorium” on foreclosure hearings, foreclosure sales, writs of assistance, and writs of ejectments, and prohibits Masters-in-Equity from proceedings “in any other manner regarding foreclosures until directed by subsequent order.” Again, while the Order’s primary purpose is likely to protect vulnerable residents from losing their homes during the crisis, the Order does not make a distinction between residential and commercial foreclosure actions. Thus, it appears that commercial foreclosures are also subject to this moratorium absent further clarification from the Supreme Court. Interestingly, this section of the Order does not provide for the same exceptions based on protection of property or persons as the rule on evictions. Lenders and landlords alike, whether in the commercial or residential context, should be mindful of the Supreme Court’s ruling when evaluating treatment of delinquent tenants and borrowers. For the time being at least, lenders and landlords will be estopped from enforcing their rights under a lease or mortgage, at least until the COVID-19 crisis has passed. Despite this, however, lenders and landlords are free – and likely well served – to communicate with their borrowers and tenants facing difficulties to come up with workable solutions that give relative security to both parties. In the cases of evictions, landlords should also be mindful of the aforementioned exception to the Order if the leased premises is being damaged, or there is some other risk to persons on the premises.

CONCLUSION:

COVID-19 will change commercial real estate in unimaginable ways. As the situation continues to evolve we can provide more analysis for what the future holds. For now, we encourage you to communicate with your landlords, tenants and lenders in the context of your various contractual agreements. We are here to help you as needed and wish you and your loved ones comfort and health during this difficult time.

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[1] “A party to a contract must perform its obligations under the contract unless its performance is rendered impossible by an act of God, the law, or by a third party. [Hawkins v. Greenwood Dev. Corp., 328 S.C. 585, 593, 493 S.E.2d 875, 879 (S.C. Ct. App. 1997]). It is not enough that performance of the obligation is “improbable or out of the power of the obligor.” Id. Unless it is established that the obligation “cannot by any means be accomplished,” it is not considered impossible. Id.; see also 62B Am. Jur. 2d Private Franchise Contracts § 228 (“as a general rule, unexpected difficulty, expense, or hardship involved in performance will not excuse performance where performance has not become objectively impossible.”). Put differently, subjective impossibility is not a defense. A party’s inability “to perform a contract because of his inability to obtain money . . . will not ordinarily excuse nonperformance in the absence of a contract provision in that regard.” Moon v. Jordan, 301 S.C. 161, 164 390 S.E.2d 488, 490 (S.C. Ct. App. 1990). [There is] no South Carolina authority supporting its contention that “commercial impracticability” is a defense. [Norfolk S. Ry. Co. v. Balt. & Annapolis R.R. Co. (D. S.C. 2015)].

[2] Under South Carolina law, “[a] party who has suffered injury or damage from the actionable conduct of another is under a duty to make all reasonable efforts to minimize the damages incurred and cannot recover damages that might have been avoided by the use of reasonable care and diligence.” Hughes v. Oconee Cnty., S.C., No. 2007-UP-461, 2007 WL 8392131, at *5 (S.C. Ct. App. 2007). “[H]owever, the law does not require unreasonable exertion or substantial1 expense for this to be accomplished.” Genovese v. Bergeron, 327 S.C. 567, 572, 490 S.E.2d 608, 611 (S.C. Ct. App. 1997) (footnote added). Furthermore, a “plaintiff is not required to act where he does not know he needs to, where he cannot financially afford to, where he is assured by the defendant that action is unnecessary, or where action would violate someone else’s rights.” 11 S.C. Jur. Damages § 7. “A failure to attempt to mitigate damages will not bar plaintiff entirely from a recovery, but will only prevent the recovery of such damages as might have been avoided by reasonable efforts on his or her part.” Rapid Indus., Inc. v. Indus. Serv. Works, Inc., No. 2007-UP-083, 2007 WL 8326617, at *1 (S.C. Ct. App. Feb. 15, 2007) (quoting 25 C.J.S. Damages § 47 (Supp. 2006)).