2020 was a tenant's market: office rents declined by 2.7% in downtown Chicago, and by 1.7% in the suburbs. Total available space increased to a record 86 million square feet. Average vacancy is expected to increase to 13.5%.

On a brighter note, real estate stocks have surged after news of successful Covid-19 vaccine test results. Investors, landlords, and tenants are now planning beyond the pandemic.

Most tenants will maintain a physical office but will reduce their office footprints to take advantage of the benefits of limited work-from-home. A 2007 meta-analysis of 46 academic studies reveals that workers see greater autonomy and lower work-life conflict when working up to 2.5 days per week at home. However, beyond 2.5 days per week, there were more significant harms to relationships with coworkers. Beyond mere productivity, work-from-home poses challenges to innovation, mentoring, recruitment/retention and company culture.

Ultimately, the suburban markets may benefit from an exodus of tenants from the downtown area. The suburbs feature low-density, low-rise buildings better suited for social-distancing measures, and lower rents compared to downtown. The suburbs also feature lower cost housing, which has become even more important as people spend more time working in their homes.

At its onset nearly nine months ago, the novel coronavirus forced federal, state and local leaders to consider measures necessary to prevent the virus’s inevitable spread. Those leaders imposed measures they calculated to balance minimizing the spread and harm of coronavirus to the national and local economies.

Whether those measures were effective in achieving those goals is a question for another day. However, now that coronavirus is currently a part of daily life, businesses have been considering what measures they must take. Like political leaders, they must also consider balancing the potential liability they may face for the spread of the coronavirus or other illness, the harm to their patrons and clients, and the harm to their bottom lines.

Commercial landlords are not exempt from considering the coronavirus or other pandemics in future leasing. It is unlikely a court would find a commercial landlord liable for the spread of a pandemic in their leased properties, except in rare circumstances. However, tenants may require landlords to provide upgrades to properties to ensure the safety of the leased premises.

This article considers whether landlords may be liable for the spread of a pandemic in their leased premises. It also discusses requirements tenants may have when negotiating the lease of commercial properties. It concludes with suggestions on how landlords should handle negotiating those requirements with tenants.

A landlord’s liability for the spread of coronavirus or other illness would likely come from a negligence lawsuit. For a landlord to be found liable, a plaintiff would need to prove several things, including that the landlord owed a duty to protect others against the spread of illness, the landlord breached that duty, and that breach caused a person’s illness resulting in damages.

While not impossible, it is unlikely a court would find that a landlord even owes a duty to a tenant’s invitees to prevent the spread of illness. Courts often find that where there is a unique relationship between a plaintiff and a defendant, such as an employer and an employee, a duty is owed. However, a landlord probably does not have a unique relationship to its tenant’s invitees. A landlord is more likely to owe a duty to its tenant.

In the rare circumstance a court does determine a landlord owes a duty to his tenant or tenant’s patrons or clients, a court then has to also determine the landlord breached his duty of care and that breach caused the harm.

If a landlord acts reasonably by providing reasonably safe premises, a landlord should not be found liable for the spread of illness in the premises the landlord is leasing. However, even if the premises are not reasonably safe, it would be highly unlikely a court could link the spread of illness directly to a portion of the premises the landlord is responsible for. For example, it would be nearly impossible for a court to determine that it was the air filtration system that directly caused a person to contract coronavirus, as opposed to contact with an infected person also in the premises.

Overall, it is unlikely a court would hold a landlord liable for the spread of illness in a leased space. Nonetheless, tenants may still demand heightened safety features when negotiating leases. By providing some of those features, a landlord may further decrease its potential liability for the spread of coronavirus or other illness in leased space.

Tenants may be worried about their own liability, as they have a more direct relationship with those parties. For that reason, tenants may request several safety upgrades when negotiating to lease commercial space.

Because coronavirus — among many other illnesses — is an airborne illness, tenants may require upgrading the air filtration components in an HVAC system. Typically, standard commercial buildings utilize filters with a Minimum Efficiency Reporting Value (MERV) rating of 11. The higher the MERV rating, the more effective the filter is in filtering particles out of the air. For perspective, MERV filters range from 1 to 20. MERV 1 filters are typically pre-filters in commercial buildings, MERV 12 filters are typically found in homes and MERV 20 filters are used in operating rooms.

Upgrading filters to higher MERV ratings may be commonplace for tenants to request when negotiating leases in the future. Albeit not cheap to upgrade an entire filter system in a large commercial space, it not only adds a shield of protection for tenants and their patrons, but for the landlord if ever sued for the spread of coronavirus or other illness.

In lieu of or in addition to upgrading air filters, landlords may also consider supplementing with additional air filters such as High Efficiency Particulate Air units or UV-C (ultraviolet) lights. These additions help reduce specifically infectious particles in the air. Both options are relatively inexpensive and add a layer of protection for both tenants and landlords in the event of a lawsuit.

Tenants may also have more stringent requirements when agreeing to cleaning specifications, which are typically addendums to leases. Tenants leasing premises in large commercial buildings with several other tenants, such as large office buildings, mixed-use developments and malls, may require more frequent cleaning of shared spaces. They may also require higher standards of cleaning, ranging from what needs to be cleaned (for example, elevator buttons) to what materials cleaning suppliers use.

What tenants may require may become expensive. Of course, a landlord can incorporate cleaning into common area expenses or additional rent. But, for expensive upgrades, a landlord may also negotiate for provisions that will limit its potential liability in the future.

For example, a landlord may negotiate to ensure a pandemic is explicitly not within the covered events within a force majeure clause. A vast majority of commercial leases currently contain force majeure clauses. However, whether a pandemic triggers a force majeure clause, relieving parties from their obligations under a lease, is a question that is currently making its way through the courts. A bankruptcy court in Illinois determined a restaurant lessor was partially relieved of the obligation to pay rent under a force majeure clause in a lease. Whether this will be the typical outcome is yet to be seen.

To avoid the uncertainty of how courts resolve this issue and having to litigate this issue in the future, landlords may explicitly exclude pandemic and stay-at-home orders from force majeure clauses. This exclusion may be a bargaining tool for a landlord when agreeing to additional safety provisions.

A landlord may also negotiate a provision waiving them from liability in the event a tenant is sued because a tenant allowed coronavirus or other illness to spread within the leased premises. These liability waivers are legal and found in many leases and license agreements, and may also include waivers from liability for illness resulting from a pandemic. Again, this provision may be a bargaining tool.

When leasing in the future, considering the consequences of a pandemic will be unavoidable for commercial landlords. While it is unlikely a court would find a landlord liable for the spread of coronavirus or other contagious illnesses through the landlord’s leased premises, tenants are sure to require heightened safety measures. By working with these tenants’ requests, landlords will be able to continue to provide high-quality commercial properties while also limiting their own potential liability.

By Addison Fairchild, Baird Holm - Click here to view article.

“From everything that we’ve experienced and that I’ve seen, this is a game changer. And it’s going to continue,” said Bob Smietana, CEO of HSA Commercial Real Estate. “I think people’s habits, and their demands in terms of distribution and receipt of goods, has changed forever.”

“There is a convenience factor,” said Adam Roth, executive vice president – industrial services, NAI Hiffman. “As an example, my parents now have bought a couple things online which is, relatively speaking, a minor miracle.”

The “just in time” process of aligning manufacturing volume with perceived demand has proven to be a flawed system. Regardless of where a widget is made, more companies now understand that it’s better to have an overstock to meet a potential surge than to miss out on sales due to lack of inventory. As consumers now expect next-day delivery on most items, this means more distribution facilities close to population centers. In fact, CBRE projections posit that every $1 billion in new sales among e-commerce companies will culminate in an additional 1.25 million square feet of demand for warehouse space nationwide.

The electronic logging device (ELD) rule, a federal mandate that passed in 2017, was designed to improve safety on the highways by requiring truck drivers to electronically record their hours on the road rather than keep physical handwritten logs. A two-year grace period closed last December and as a result, the truck driver pool has been reduced.

As of this January, the Federal Motor Carrier Safety Administration also maintains a drug and alcohol clearinghouse, tracking truck drivers’ failed drug tests if and when they move to a new carrier. As a result, there are currently about 35,000 truck drivers that are “suspended” due to drug and alcohol clearinghouse.

Matt Baker - RE Journals

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