The Risks of Reopening Retail and Other Businesses

“Should I stay or should I go now?  If I go there will be trouble. If I stay it will be double.”
The Clash, 1982

Business owners, especially retailers, are asking themselves this question seemingly only moments after they faced the decision to close their businesses in response to various stay-at-home and shelter-in-place orders.  First, Georgia Governor Brian Kemp and soon after, Simon Property, shook the country just as it was settling into its new home-office, Instacart, curbside pick-up lives.  Under the guise of returning to “back to normal” in the face of dire economic conditions, a business owner needs only to look at the fine print of Governor Kemp’s Order (and others that have followed as the calendar has turned to May) and Simon’s COVID-19 Protocols for re-opening to see how abnormal this plays out in real life.

All of that fine print is where the law, and mitigating the risks of the “new normal”, come into play. Employment, finance, and real estate law all converge as public officials and business owners across the country are confronting a classic Hobson’s choice of bad alternatives.  Hence, the 60 pages of Simon re-opening guidelines for its tenants and customers, including such customer-welcoming sections as, “exposure-mitigation protocols.”  Retail tenants, commercial property owner-landlords, and lenders (who often have the last say) must prioritize the health and safety of employees and consumers.  But they also must measure the importance of their financial well-being (and, in many cases, ability to survive), and their strong desire to re-open, against the reality of what actually happens when they reopen.

Employment Issues

As a threshold matter, opening for business does not mean that your employees will follow or are even mandated to return to work. While Governor Kemp in Georgia has led the charge to declare that Georgia is open for business, his Executive Order of April 30, 2020 that remains in place until June 12, 2020, carries forward certain shelter-in-place mandates for employees who are over sixty-five (65) years of age or who may have health conditions that would place those employees particularly at risk if they contracted COVID-19. Separately, employees may be entitled to leave benefits or teleworking accommodations under the Americans with Disabilities Act, and potentially even paid leave under the Families First Coronavirus Response Act (“FFCRA”). Therefore, employers cannot automatically assume that they can call all employees back to work without risk.

The next question for retailers and other employers is how to maintain a safe workplace for those employees who are being returned to, e.g., malls, stores and other workplaces. Factoring the increasing media scrutiny on businesses with employees who have contracted COVID-19 and the still concerning COVID-19 exposure statistics, employers, at minimum, need to develop clear “return to work” policies that factor applicable OSHA industry-specific regulations and CDC best practices, including, without limitation, those relating to social distancing and gathering, the wearing of masks, and implementing cashless transactions. Employers also need to train on those policies, and continue to follow CDC guidelines and applicable privacy regulations when addressing how to respond to employees who are potentially exposed to COVID-19. At the same time, more than ever, employers have the ability to ask employees specific health-related questions before permitting them to return to work. It remains uncertain whether employee claims resulting from COVID-19 exposure incidents will be addressed through OSHA, state worker’s compensation, or general negligence principles.  The only certainty is that those claims will be brought as part of the wave of pandemic-related litigation to follow (unless Congress passes liability shield legislation). Accordingly, if your business is planning to reopen or has reopened, developing comprehensive and legally sound return to work policies and protocols should be very high on the already long “to do” list.

Furthermore, with many businesses reopening only in part, employers who have received Paycheck Protection Program (“PPP”) loans need to factor staffing and compensation decisions in light of the loan forgiveness provisions in the CARES Act. Indeed, companies with PPP loans, at least through June 30, 2020, are incentivized to rehire employees who were terminated or furloughed between February 15, 2020 and April 27, 2020 to maximize loan forgiveness. Likewise, those employers are incentivized to delay termination or compensation reduction decisions until July 1, 2020. At the same time, the decision to reopen, even in part, may negatively impact the availability of paid leave under the FFCRA or now richer unemployment benefits for employees who have been instructed to stay home during the pandemic. All of these interrelated issues mandate careful planning for employers who are attempting to balance economic constraints with the need to retain talented employees as their businesses phase into reopening.

Retail Issues

As malls and some retailers re-open, not only are they faced with health issues and employment issues, but also the financial implications of their decision.  When state mandates and center closures decrease, so does the strength of retailers’ legal arguments against operating and paying rent.  For the last month, retailers have been citing force majeure clauses in their leases that absolve them of performing duties under the contracts.  Many relied on provisions citing “government mandates” that are rapidly fading.

Meanwhile, commercial landlords need tenants, and preferably financially successful tenants. Landlords are learning that expecting most tenants to pay full rent right now is foolhardy, especially those opening with skeleton crews, appointment-only shopping, and whose customers are far from embracing the exposure-mitigation protocols of the May 2020 shopping experience.

The leverage seems to have to have tilted toward the landlords, but the backlash associated with re-opening is real.  Just because Simon opens its malls, it does not mean retailers are opening their stores – many are not.  Regardless of opening of their stores, it certainly does not mean retailers are opening their wallets to pay full rent.  Rent deferments, either 100% or something less, through the summer, with lease term extensions to match, and co-tenancy waivers thrown in, are common.  However, there is no one size fits all approach.  The specific lease language and local laws are key, as is the type of business and its ability to create revenue during COVID-era shopping rules.  So, negotiations continue, albeit today with a different bent then last month, and uncertainly as to what next month will bring.

Lender Issues

A commercial landlord must understand its loan documents before re-negotiating its leases. Many loans have prohibitions against rent concessions, waivers, and other lease modifications without prior lender consent. Failure to obtain required lender consent will constitute a default under the loan documents.  Provisions that protected the landlord’s interest in the property may vanish. Loan guarantors are also in jeopardy.

Many lenders understand the realities imposed by COVID-19 and are granting consent for those tenants who are truly unable to pay.  Some lenders have even provided broad consent in the form of specific guidelines under which the landlord borrower may grant rent concessions or other modifications to tenants. In approaching their lenders for rent concession consents, landlords should negotiate for some flexibility as to the timing of rent concessions.  Some tenants need the landlord to delay the timing of the concessions in order to allow tenants to take full advantage of the benefits of a PPP loan, which, in turn, benefits the landlord and the lender.

Rent concessions and other lease modifications may also result in a borrower’s inability to comply with the financial covenants in the loan documents or may trigger cash management, reserve, or other requirements. The landlord borrower should be sure to analyze the impact of the concessions and any other lease modifications on financial covenant compliance and other triggers and address these issues with its lender.

In short, landlords should not forget about their lenders. Prior to taking any action with respect to tenants or their retail centers, landlords who have loan debt should understand the impact their actions have on their financing obligations. Understanding and addressing loan issues are an important and necessary consideration for the future of the retail center and their owners.