With the current stay-at-home order in place, many businesses deemed “non-essential” have had to cut hours or close completely. For many, they wonder how they will make it through this pandemic.
There are a few options that some businesses may not know they have when it comes to paying rent, and it starts with a thorough review of their insurance coverage and lease details. Below, we review a few of the questions we are seeing during this time, along with a few suggestions that could help businesses stay afloat.
Will Business Interruption Insurance Coverage help during the COVID-19 closure?
We have had several clients ask whether the business interruption coverage they purchased will cover a shutdown or slowdown in their business operations as a result of the COVID-19 pandemic and resulting stay-at-home orders. While no policy is the same, a thorough review is the only way to know whether your policy will cover a claim related to the COVID-19 pandemic. Many such policies have an exclusion for losses due to viruses or microorganisms.
Additionally, most of these policies require that your business premises suffer physical damage, and closure from civil authority may not count as physical damage. The provisions for civil authority closures often require physical damage to property within a short distance prompting the closure of access to your business premises, and this coverage is usually for a short duration. However, there is no way to know what your policy covers and excludes without reviewing the policy itself.
Do I even have to pay rent?
You may have heard that the North Carolina Chief Justice has prohibited foreclosure and eviction proceedings until June 1, and wonder whether that will allow you not to pay your rent. While the Courts are not conducting eviction proceedings, commercial leases often provide landlords with the right to lock the tenant out of the premises. Additionally, the inability to proceed with an eviction does not stop the obligations to pay rent.
Alternatively, you should work with a lawyer and devise a plan to maintain your tenancy while not putting your business in financial difficulties with little to no revenue. This will depend on many factors, including; the remaining term of your lease, the terms of the lease itself, your relationship with your landlord, the proposal for any changes to the lease, and whether there is a personal guarantee. Your landlord may agree to allow you to skip a small number of payments and spread those payments over the balance of the lease (if it’s relatively short) or a shorter period (if you have years remaining on the lease). This allows you to use reserves or revenue still coming in to pay other obligations while still paying your tenant the same amount over the term of the lease.
Another option would be to tack the number of months you miss onto the end of the lease, but many landlords may not like this because it ends up with you getting free rent and extending the tenancy. One factor that may affect your obligation to pay rent is whether the landlord closed access to your business and whether you could otherwise be open. Depending on the terms of your lease, you may be able to forgo paying rent if you do not have access to your premises due to the landlord’s decision.
What about Bankruptcy?
Bankruptcy is an option for companies whose liabilities exceed their assets. Chapter 7 would liquidate the assets, distribute the proceeds to creditors, and shut down the company. This would only be an option for those companies that do not want to continue operating in the future. Chapter 11 would allow a company that wants to continue operating in the future a reorganization opportunity, and all creditors would take a reduced amount in hopes of receiving more than liquidation would provide. Bankruptcy would not remove the obligations of any personal guarantees in place and may make bankruptcy an unnecessary expense.
If you would like to review your business insurance coverage to see what your options are, give us a call at (704) 919- 1519.
These materials are for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.