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At the start of the COVID-19 pandemic, Alameda County instituted moratoriums to prohibit nearly all evictions. Though the statewide California moratorium ended in 2021, the city of Oakland and Alameda County continue to uphold the prohibition of evictions even now. As a result, the California Apartment Association has been trying to build a case against Alameda County. In addition to a group of rental property owners filing a lawsuit against the City of Oakland and Alameda County, CAA has been conducting outreach to identify plaintiffs who claim that the moratorium his infringed on their constitutional rights. The eviction moratorium is designed to prevent property owners from repossessing rental units in all but very limited cases. This has had the effect of prohibiting landlords from evicting tenants in the event of a failure to pay rent, or to otherwise uphold rental agreements. Though the federal government has provided over $100 million in rental assistance funding, landlords contend that this money has not been efficiently distributed. Some landlords reported new issues with tenant payments that developed under the moratorium but were unrelated to the COVID-19 pandemic. They feel that these tenants have unfairly taken advantage of the eviction ban to avoid repercussions for bad behavior or failure to pay rent. As a result, property owners feel like their livelihood is in jeopardy, arguing that the moratorium is too extreme to be justified. As local economies and institutions repeal their COVID-19 policies and our perception of the threat level decreases, property owners contend that tenants no longer need special protections. Support for ending the moratorium continues to build, and CAA is collecting testimonials from property owners who feel cheated by the moratorium. More information is available on the CAA website.
A new piece of federal legislation may have major impacts on certain business entities in the United States. The Corporate Transparency Act (CTA) was part of Congress’ National Defense Authorization Act for Fiscal Year 2021. This law was enacted on January 1, 2021 and will take full effect January 1, 2024.
The CTA imposes new reporting requirements on new and existing limited liability companies, corporations, and any other entities defined within the Act as “reporting companies”. These entities will be required to report the personal information of their beneficial owners to the Financial Crimes Enforcement Network. This includes information such as full legal name, address, and personal identification number. Reporting companies will also have to report any changes to beneficial ownership within a year of their occurrence. According to the CTA, a “beneficial owner” is an individual who exercises substantial control over or holds at least 25% ownership in a reporting company. This designation does not include children under the age of 18 or any intermediary leadership.
Some entities will be excused from these new regulations, including tax exempt and publically- traded entities. For reporting companies that are covered by the CTA, noncompliance with the Act can result in fines of up to $500 per day or even a prison sentence. However, noncompliance does not prevent an entity from forming or conducting business.
All American corporations, LLCs, and other business entities should have their legal advisors review the Corporate Transparency Act thoroughly to determine if they are required to comply with these new regulations. For California entities, these requirements will create another level of reporting in addition to California’s initial Statement of Information and annual (for corporations) and/biennial (for LLCs) required filings.
Since the beginning of the COVID-19 pandemic, both landlords and tenants have been wondering whether tenants will be relieved of their obligation to pay rent—or even allowed to terminate their leases—due to government-mandated premises closures. Tenants have attempted to assert such rights based on the novel application of various contract law principles, including frustration of purpose, illegality, and force majeure (which excuses a party’s performance of a contract if prevented due to so-called “acts of God”, war, insurrection, strikes, etc.). Recently, a U.S. district court in New York has issued a milestone opinion favorable to commercial landlords in the post-COVID retail real estate environment.
In the case of Gap Stores Inc. v. Ponte Gadea, the tenant (“The Gap”) alleged that, because the pandemic had forced the closure of its flagship New York City Gap and Banana Republic stores in March 2020, The Gap was excused from paying rent and its retail lease at Lexington Avenue and 59thStreet had terminated. The Gap sought a complete release from its lease obligations following the store closure on various legal theories.
Interestingly, The Gap was the plaintiff in this lawsuit. It sued the landlord for breach of contract, declaratory judgment, rescission, reformation, and unjust enrichment, arguing (among other things) that COVID-19 had rendered compliance with the lease impossible under the force majeure clause, and that the pandemic constituted a casualty under the lease. The landlord counterclaimed for declaratory judgment and breach of contract.
After The Gap stopped paying rent, the landlord terminated the lease in June 2020 (on the same day New York City entered “phase one” reopening allowing retail stores to offer curbside pickup—which one of the two stores did begin to offer). During the summer and early fall of 2020, after the landlord had terminated the lease, the two stores remained closed to in-person shopping, but were used for online order fulfillment. Notably, The Gap opened other Manhattan retail locations for in-person shopping during this time. Finally, in September 2020, The Gap notified the landlord that it intended to vacate the premises by October 15, 2020.
The lease contained typical force majeure and casualty provisions. The force majeure provision defined a force majeure event as “strike or other labor trouble, fire or other casualty, governmental preemption of priorities or other controls in connection with a national or other public emergency or shortages of fuel, supplies or labor resulting therefrom, or any other cause beyond Tenant’s reasonable control.” It did not specifically mention a worldwide pandemic, and it did not excuse the payment of rent due to force majeure. The casualty clause only allowed the tenant to terminate the lease under certain circumstances due to “fire or other casualty” and gave The Gap the right to a rent abatement if any part of the premises were deemed “unusable” for 14 days or longer due to casualty.
The Gap raised an assortment of other legal arguments: (1) That the lease’s underlying purpose was frustrated by the pandemic; (2) that The Gap’s performance was rendered impossible, illegal or impracticable by the stay-at-home orders; (3) that there was a failure of consideration under the lease due to the pandemic; and (4) that there was a mutual mistake as a result of the parties’ failure to address the possibility of a worldwide pandemic in the lease. In response, the landlord argued that, because it had terminated the lease in June of 2020 and The Gap continued to occupy the premises after that date, The Gap was obligated to pay holdover rent from and after June 2020 (typically anywhere from 125% to 200% of the stated rent last in effect before the termination, although the decision is silent on this point).
Ultimately, the court sided with the landlord, finding that The Gap was not released from its rent obligations under the lease, granting the landlord’s summary judgment motion and ordering The Gap to pay holdover rent from and after June 15, 2020. The court rejected each of The Gap’s arguments, finding that:
Although this New York decision does not set a precedent that California courts must follow—and every lease dispute will necessarily depend upon the specific language in the particular lease, this case provides a solid roadmap for California landlords bringing or defending COVID-related litigation with their tenants. Unless overturned on appeal, the ruling will certainly be informative to future cases involving these legal theories.
It is no secret that legal drafting requires a fair amount of precision in order to prevent misinterpretation and keep loopholes closed. “Shall” has been used pervasively in contracts and other legal forms for generations to express the compulsory nature of a party’s obligations. But use of the word can have problematic implications in a litigation setting, and as a result, attorneys should consider weaning away from the ubiquitous word “shall” in legal documents. While “shall” is generally used to indicate a mandatory obligation, the word itself is ambiguous enough to obscure the original intent of the document’s author. “Shall” can be interpreted as “may” or “must” or even “should”, all of which have drastically different meanings and connotations. The U.S. Supreme Court ruled as early as 1995 that “shall” can be interpreted to mean “may”. Instead of using “shall” repeatedly throughout contracts and leases, attorneys are being encouraged to use words that unequivocally indicate obligation—such as “must” or “will”.
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