Business Interruption and the Impact on Real Estate

Featuring: Caroline Antonacci, Esq., Michael G. Ornstil, Joseph P. Farina (Retired Chief Judge, 11th Judicial Circuit, Florida) and Hon. David A. Garcia (Ret.)

COVID-19 has had an enormous impact on businesses of all kinds. But organizations in the real estate sector—both commercial and residential—have been hit particularly hard. The fallout from the pandemic has sparked numerous disputes between landlords and tenants over nonpayment of rent. Property developers and contractors have found themselves similarly at odds—in their case, due to pandemic-related work stoppages and shortages in labor and materials.

Of course, conflicts among these parties are not unusual. What is unusual—unprecedented, even—is that “you’ve got governmental involvement in the real estate sector in a way that has never existed before,” says JAMS neutral Caroline Antonacci. In the case of commercial landlord-tenant disputes relating to nonpayment of rent, “You've got the economic impact that is causing nonpayment, but behind that is a social policy saying that certain businesses cannot function at this time because of this pandemic.” At the same time, government-mandated eviction moratoriums have deprived residential landlords of their most powerful weapon against nonpaying tenants. And, the closure of civil courts—again, by governmental decree—has diminished the ability of all parties to resolve real estate disputes using traditional channels.

You would think that this extraordinary set of circumstances would result in a surge of cases for JAMS. While there has been an uptick of cases involving landlord-tenant disputes submitted to mediation, the surge has not been as robust as one might expect. “Based on what I’m seeing,” says JAMS neutral Michael Ornstil, “there has been a real sensitivity by business in terms of how tough they want to be and how litigious they want to be in the middle of a crisis.” He continues, “There’s been a sense that we’re all in this together. So while we expected the potential for an onslaught of lawsuits and arbitration demand pursuing breach of contract claims, it has been less than anticipated.” But once normalcy is restored—when eviction moratoriums are lifted and businesses resume normal operations—“I anticipate that we will see a flood of requests,” says JAMS neutral Joe Farina, particularly in the commercial arena.

Mediating these cases, once they flood in, will require a deft touch. “You do need to have some sensitivity for the situation,” notes JAMS neutral David Garcia. After all, says Antonacci, “These are not cases where the parties charted their own course. The course was imposed on them by forces outside of their control.”

In Ornstil’s experience, appealing to the parties’ humanity goes a long way: “I have found that it resonates to say, ‘Yeah, there’s been a breach of contract,’ or ‘Yeah, they were not able to fulfill their obligations. But they have a darn good excuse.’” Being practical and pragmatic is also important. “At the end of the day, landlords may very well have to take less than a full dollar to create cash flow to satisfy their own creditors,” says Farina. Fortunately, he notes, “These real estate folks are pretty pliable, and a lot of them are in for the long haul, not for the immediate return.”

“These cases invite creative solutions,” says Antonacci. This makes them particularly well-suited for resolution by way of ADR, which can offer a spectrum of mutually beneficial solutions that might not be available in a more traditional setting. “Juries are asked to follow the law and to comply with jury instructions that the judge gives them,” Ornstil explains. In contrast, “Mediation allows you to work out a deal, work out a payment plan, work out a new lease.”

Resolve Real Estate and Real Property Disputes with JAMS

Disputes in the real estate sector can be extremely complex and expensive, especially when the disagreement suspends work on a major development or delays a transaction for months or years. Landlord/tenant disputes can be particularly contentious. Mediation or arbitration allows faster and less costly resolution of disputes than litigation, keeping projects moving forward and fostering stronger buy-in from all parties.

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ADR offers other benefits, too. One of these is timelier resolution—particularly attractive in our current environment, as many courts are backlogged, running months, if not years, behind. Another is confidentiality. “Usually, the landlord is the one who wants confidentiality,” says Garcia, because “they might not want to publicize that they’ve forced the eviction or to create a stress on other tenants.” He continues, “But the same thing goes for tenants—they need confidentially for their own personal protection, because public reporting of evictions can affect their ability to find replacement housing.”

Finally, ADR offers all parties the flexibility to convene in person, online or both, based on their preferences. JAMS has invested heavily in the technology needed to accommodate virtual and hybrid proceedings, even after the pandemic passes. Farina, for one, welcomes this shift. “Having people participate from their own home or their own office gives them a certain level of comfort and helps them feel at ease. There’s less stress, less anxiety,” he notes. “And when they feel that way, I think they’re more inclined to make better decisions.” Indeed, says Farina, “In my experience, we are settling a higher percentage of cases with virtual mediations than we did in person!”

Virtual proceedings won’t be the only long-term holdover from the COVID-19 pandemic. Another will be the continued disruption of the real estate sector. “Once COVID is no longer a clear and present danger, I think businesses are going to reevaluate their real estate needs and how they use their real estate,” says Ornstil. “And I think it will be a while before we all digest what has happened and what adjustments make sense.” Garcia agrees. “Particularly in the commercial area, I expect there is going to be a lot of renegotiation of leases, with both sides seeking stability.” Garcia also predicts that in the coming years, landlords will choose their tenants more judiciously and that tenants will take more care to select living arrangements that are within their means.

Beyond that, Antonacci expects to see changes in real estate leases—particularly with regard to force majeure. “Previously, force majeure clauses were afterthoughts, buried at the end of contracts, if they were there at all,” she says. Now, however, “Attorneys are carefully examining these clauses, and I think these clauses are going to become very important in contracts in the future.” Ornstil agrees. “The fine print is going to become really important. Lawyers on both sides are going to start getting very creative in crafting lease terms.”

One thing is certain: JAMS will be handling these pandemic-related cases for years to come. And although she’s sensitive to the difficulties that parties on all sides have endured, Antonacci is energized at the prospect of helping them. “If you enjoy working with the law and social policy, if you can appreciate the economic conflicts that are in play here, it really tests the legal ability and the creativity of someone who practices in this area,” she says. “It’s a very exciting, challenging and dynamic time to be working through these issues.”