ICYMI: Tenant Obligations Discussed with Plunkett Cooney

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The ongoing global crisis has amplified several existing risks for commercial real estate. In a Tele-Town Hall on the topic of tenant obligations, Plunkett Cooney Partner, Scott K. Lites joined Tammy Carnrike, the chief operating officer for the Detroit Regional Chamber to discuss the legal remedies and other resources available for businesses forced to close amid Michigan’s “Stay at Home, Stay Safe, Save Lives” Executive Order put in place to stop the spread of COVID-19.

Due to the unprecedented nature of the crisis, Lites encourages tenants struggling to pay rent to apply for collateral-free loans under the CARES Act and work with landlords to request forbearance agreements when necessary. Noting, these options are always in their mutual best interest because landlords prefer to keep properties consistently leased.

Despite the existing risks of below-market-rate leases and Michigan tenants’ independent obligation to pay rent, notwithstanding the many new effects of the crisis on commercial property, it remains open to judicial interpretation whether or not tenants would remain liable for lease terms absent contracts written explicitly to the contrary.

Some main Q&A highlights from the discussion:  

Canrike: Without a specific contractual right in their lease, does a tenant have the right to not pay rent because of COVID-19 pandemic?

Lites (03:13): Legally, the answer is no. At the end of the day, there can be a bunch of factors, and what I’ll call delay tactics, that can be put in place in the short period of time while businesses are shut down to stop landlords from evicting tenants pursuing their legal claims. But there is an independent obligation under Michigan law to pay rent. It’s independent of everything else.

Unless you contract to the contrary. Frankly, even for the most sophisticated real estate lawyers, it’d be very unique that they would have negotiated or drafted such a provision to take into account this COVID-19 pandemic. It’s almost an impossibility to anticipate a disaster like we’re facing today.

Carnrike: What are the risks if a tenant doesn’t pay their rent?

Lites (05:05): Well, the remedies are what landlord remedies are under Michigan law. The one that I think is most important for this audience to consider is what happens if I’ve got a below-market-rate lease and I don’t pay and a landlord serves me with a 30-day notice to terminate. Under the law in Michigan during that 30-day period, you have to cure, you have to pay the back due rent, or the landlord can terminate the lease agreement and then you’re out of your space. So, that’s a tough box to be in for sure. that’s just a very tough situation. If you give me a hypothetical, assume that the market rate for your space is $20 a foot and you’re only paying $10 a foot cause you were smart enough or fortunate enough to sign a great lease whenever you executed it. (Continued 06:01) If the market’s changed and lenders may say, I’m going to terminate the lease, I can get more rent from not necessarily this tenant, but a different tenant they can.

Carnrike: Force majeure – can this pandemic be considered an Act of God?

Lites (09:04): Well, force majeure, those provisions are construed very narrowly. Under Michigan law is has to be almost specifically identified. That goes back to what I said before about most leases don’t provide that a pandemic is going to be identified, but it could be. But in my opinion, under Michigan law, this is not an Act of God. An act of God is a hurricane; It’s a tornado; It’s not a government shutdown. The other thing you could decide though, remember this is all subject to judges rulings and in state courts, which is where landlord-tenant cases are heard, judges are elected by their constituents. So, my guess would be that they would probably be more inclined to rule with a tenant if there was a judgment call then with one of the big bad landlords. So that would be a factor as well.

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