Many galleries globally are navigating the reality of being closed until further notice and also having to worry about paying rent for one or more locations. For instance, just this morning the Art Newspaper announced that Hauser and Wirth has delayed opening its 542 West 22nd Street headquarters.
As gallery tenants grapple with rent payments coming due at the end of the month and lease obligations, galleries should be aware there are ways to protect themselves. In some cases, there are even arrangements galleries can make with their landlords to help during hardship.
To help manage tenant and landlord relationships during the era of the coronavirus, we wanted to share our global thoughts and provide content from a bicoastal US and UK perspective. In this conversation, my colleagues, Ilyse Dolgenas (New York) Steve Wilson (California), and Paul Brecknell (London) address some key hurdles gallery tenants can overcome as it relates to leasing obligations in the US and UK.
Global Head of Art Law
Many art galleries’ leases are being impacted by the recent situation. What should these gallery tenants do first to ensure their commercial lease protects them?
Concerned gallery operators should have their leases reviewed by experienced leasing attorneys in order to fully understand their rights and obligations. A contingency plan can then be thoughtfully established. Landlords should not be contacted before the lease is reviewed.
The only option open to gallery tenants in England is to negotiate a rent-free period or a deferral of rent. This is more likely to be successful of course if the tenant has some leverage, which ranges from a threat to 'break' or not renew (if either event is on the near horizon) to a warning that the tenant entity could be pushed into insolvency.
If a gallery is about to take space, then it should look to ensure that all payments are deferred by any period during which they are prohibited from trading at the premises.
In the current environment can a tenant assert “force majeure” or “Act of God” in order to be released from its lease obligation?
It would be somewhat unusual for a tenant to find comfort under the terms of its lease. Most leases are drawn by landlord counsel. "Force majeure" and "frustration of purpose" (or the related term “impossibility”) are common-law derivatives rarely found in U.S. commercial leases unless the tenant has unusual bargaining power. Still, each lease should be examined for reference to those terms. A force majeure clause, if found, normally enumerates the qualifying events, which could excuse or delay a tenant’s performance under the lease. “Epidemic” is occasionally enumerated, or may be implied under “national emergency”, but not as frequently as for instance war, natural disaster or even strikes or national materials shortage. “Frustration of purpose” (or its analogs), is very hard to establish, and the counter to it here is that a temporary frustration doesn’t meet the proof standard.
It is almost unheard of for an English lease (or an agreement to take a lease) to contain a "force majeure" provision. So this argument falls at the first hurdle. There is no scope for landlords to bring an insurance claim in these circumstances, unless their 'loss of rent' cover kicks in in the event of pandemic, which would be a very unusual insured risk.
What should tenants do in respect of their insurance coverage? What effect would the landlord’s coverage have in relation to the pandemic?
The tenant’s insurance policies should be carefully examined either by an experienced insurance broker or (preferably) by an attorney experienced in coverage matters for the extent of coverage, including any relevant exclusions, afforded under business interruption and contingent business interruption provisions. The first covers losses resulting when the policyholder’s business is directly affected; the second insures against risks of indirect loss, typically when suppliers or customers are affected. Coverage may be triggered even in the absence of direct physical damage to the business. Some cases hold that coverage is triggered due to certain intangible conditions, such as bacterial contamination rendering a business uninhabitable. Some policies also include losses directly occasioned by governmental action. Business-owner (tenant) and landlord coverages differ. Tenants should not expect landlords to willingly file claims, and needless to say, insurers will not be eager to pay these claims. Patience and persistence will be required. The normal first response by insurers is that coverage will not be admitted unless the nature of the loss is directly included in the policy.
This is going to be policy specific. However, most business interruption insurance policies in England generally only covers loss resulting from physical damage to premises and exclude the economic impact of pandemics.
For those facing financial hardship, what is being done at a government or state level to mitigate the impact of COVID-19 on their business? At what point can a landlord take action to terminate commercial premises leases for non-payment of rent? What is the potential impact to the tenant for not paying rent?
In this environment, the laws and regulatory orders of each state and local jurisdiction must be carefully reviewed. For the tenant, there may be for instance moratoria on evictions or other helpful enactments. Some of these measures may require the tenant to retain its workforce to qualify for benefits. It is also possible that a local court system may have enacted a “Rule of Court” which, without changing substantive law, affects priorities of setting for hearings or trial in a way that provides tenants additional time. If, for instance, many court personnel are furloughed for an indefinite period (as now in the Bay Area) and civil proceedings are effectively back-burnered, the landlord may expect that an eviction would be far in the future. This provides an incentive to parties to renegotiate rent or other terms.
Commercial evictions in most jurisdictions require a mandatory settlement conference prior to trial. With the backlog in civil cases building up, expect there to be additional court pressure to attain out-of-court resolution of disputes, again aiding the tenant. The easiest settlement to sell to a tenant is of course recasting the rent schedule rather than rent forgiveness. This may call for rent abatement or reduction for a period of months, with the abated portion ratably added back to rent over the reminder of the lease. The lease term may be extended to better accommodate the schedule. Additionally, there is a New York State Executive Order, in which New York broadly prohibits enforcement of any eviction or foreclosure for any residential or commercial property proceedings for a period of 90 days.
The main concession for retail clients including art galleries announced so far is a 12 month 'holiday' from 'business rates' (local tax) starting on 1 April. To benefit, the business must be 'based in England'. There is not yet any guidance on what this means so relief may be limited to galleries held in English companies. As rates are typically equivalent to about a third of the annual rent, this relief effectively equates to a quarter free of rent or rates.
The UK Government announced that no lease termination for non-payment of rent may be actioned by a landlord until 30 June at the earliest. Ultimately, a tenant pays the rent or it gets sued for the debt or it loses the lease.
In the short-term, what steps can a tenant take to negotiate the terms of their lease agreement to protect their business?
After having the lease examined, the tenant’s best move is to immediately start a factually-supported paper trail that would underpin a negotiated lease restructuring, or at worst give a judge reason to use procedural and docket management tools to make it highly inconvenient for the landlord to pursue a case.
Tenants should always remember that every action taken and every letter written is part of a record which will either find its way into evidence or become a tool to be used in a settlement conference. Act strategically and in good faith, not impulsively, always keeping your endgame in sight. A fact-based offer of compromise is important.
As mentioned above, this is about cutting a deal with your landlord. The options include:
- no rent/reduced rent for a period
- deferred rent eg rent-free now and higher rent spread over future rent quarters or years
- payment monthly in advance – rather than quarterly.
Follow the link to view other Q&As in our The Art Market Adjusts Q&A Series.