We have to close our gym! What can we do about our lease obligations? What about income?
1. Quickly consider alternative/home-based workouts. Sometimes necessity has to be the mother of invention. Consider setting up a “virtual gym” for your members who may also be stuck at home because of school closings, work closings, etc. If you can still actually access your gym (i.e., you are not under a “shelter in place” order), set up a camera and do a Live Stream. Perhaps do it outside! (Maybe cajole your members outside, too!) Consider loaning out some of your equipment for the duration of any closing (keep a very good list of who took what, of course!) Maybe come up with “prizes” (case of Corona, anyone?) for members who can show that they kept up with their workouts – what about a dedicated “hashtag” related to your gym on social media? How about a prize for the biggest [weight loss/bicep increase/squat hold] differential during your shutdown? This is likely to be your best bet to keep your income flowing – keep your members happy and keep them working out. Your head too full to come up with workouts on your own? Always remember that Crossfit® HQ has your back 😊 www.crossfit.com/workout/
2. Consider novel payment options. Perhaps, as an alternative to suspending monthly memberships, give your members the option to continue to pay while you “add more time onto” the “end” of their memberships. At our gym, we don’t have “punch cards,” we have drop-in fees (highest $), monthly fees (worthwhile if you’re coming more than once a week), and then annualized fees, paid monthly (lowest rate by far). When given the option today, annualized members seem overwhelmingly to be choosing not to suspend. As Crossfit members, we love our affiliates – give your members choices to help you that are still beneficial to them. Keeping payments flowing during the crisis should be your main goal – give something in the future to smooth your situation now. Even the promise of a Mexico-inspired (Corona, remember?) member party at the end of all this will keep community spirits up.
3. Keep updated on your mayor’s proclamations. For example, as I write this, our local mayor and two others in different states’ cities (found in a cursory Google search) are stating that landlords cannot penalize tenants (including commercial tenants) that are unable to make their rent during the pandemic. Be sure you understand what might be available to you, and what you need to do to avail yourself of it. This might also include checking out any tenant organizations that cover commercial leases, as well as your local small business organizations. While it might seem unpalatable to take out a loan due to this situation, it is a better choice than to get behind on your obligations – things inevitably wind up snowballing.
4. Read your lease. In general, to get a break as a tenant, you’d need to prove that either (i) your obligations under the lease have “substantially changed” so that it’s impossible to perform the lease (deeming the lease “frustrated”); or (ii) that a global pandemic like COVID-19 fits under a “force majeure” boilerplate in your lease.
Unfortunately, though not surprisingly, most leases do not have protections like this. Most (if not all) leases are drafted by the landlord. If you didn’t involve an attorney in your lease negotiation, it’s virtually guaranteed that your contract is “silent” on protections for you as a tenant. Moreover, in general, commercial leases require damage/destruction to the premises itself for rent suspension to be triggered under (i) in the above paragraph – and a pandemic doesn’t fit the bill.
What about (ii), force majeure? Force Majeure provisions address “Acts of God” – events “beyond the reasonable control of a party” that prevent that party from performing their contractual obligations. A typical “Act of God” is a hurricane, earthquake, or a flood.
Sadly, it’s important to note that, even if a contract has a force majeure clause, nearly all of them exempt ”monetary obligations” (such as rent payments). But, it can’t hurt to take a look: If your contract has one, and it includes language that says “including, but not limited to…” then perhaps you can suspend your performance (in the case of a lease, this would be paying rent) until you can re-open your doors. However, this doesn’t actually excuse your payments . . . it just allows you to push your payment forward by the amount of time it takes to right yourself (or for the number of days stated in the contract – some state that you can push your obligations forward, for example, “the lesser of” the amount of time that it takes to right yourself, or [10] days).
As an aside, if you do happen to find a force majeure clause in a contract, also know that an Act of God clause can’t protect non-performance if the force majeure event occurs after the delayed performance; there are also always very specific notice provisions.
If you’re actually planning to just throw up your hands and default on your contractual obligations, it really is strongly advisable not to do this. If your lease has an “attorneys’ fees” clause (nearly all of them do), it will cost your landlord nothing to sue you if/when they win – you’ll be paying all their fees and court costs. And… since you have your lease out… definitely check for things like: (i) acceleration clauses (which state if you are ever late, the entirety of the lease term’s payments are due immediately); (ii) attorneys’ fees clauses; (iii) penalties/interest clauses; (iv) jurisdiction clauses (did you agree to an inconvenient forum, and law that isn’t tenant-friendly?); (v) personal guarantee clauses (where, even if you’re incorporated, you are personally liable for the payments – a/k/a the “lose your house” clause); (vi) etc.
5. Don’t forget to look at your insurance. While Force Majeure provisions, in general, allow a party to suspend performance until a catastrophic event is over, what covers loss of business due to general fear, governmental direction to engage in “social distancing,” or orders to shelter in place/stay home? This will severely impact many “brick and mortar” businesses, such as bars, event venues, restaurants, theaters, and, of course, gyms.
While some business insurance/business interruption policies cover disruptions, in general, they cover loss of earnings due to an ‘insured peril,’ which also require property damage. While Contingent Business Interruption (CBI) insurance is generally broader, you would have needed “Back to the Future” foresight to add this rider onto your business interruption insurance before the occurrence. Unfortunately and unsurprisingly, after the global outbreak of SARS in 2002-2003, many insurers have excluded viral outbreaks from standard business interruption policies, and coverage may only be procured through special endorsements/riders purchased at the time of coverage. (In other words – it’s too late now, sorry ☹ )
In sum, while insurance covering non-nature-related “interruptions to business” (such as strikes, lockouts, or down utilities) can compensate both parties during the period at issue, it’s unlikely (without physical loss or property damage) that business interruption and other current forms of coverage will compensate either landlords or tenants for loss of business or rent merely because the government mandates that potential customers stay home.
6. Throw yourself on the mercy of the courts? Since your lease is likely silent on force majeure, and your insurance likely doesn’t call out “COVID-19” directly, if your landlord sues you, the courts in your jurisdiction will determine whether you win based on the foreseeability of the event and the jurisdiction’s statutes/ precedents. But don’t hold your breath. For example, in an insurance case where an event organizer intended to lease space at the Jacob Javits Center in Manhattan shortly after 9/11, but the City of New York decided to utilize the Javits Center as an operational hub and therefore “ordered” it closed to non-first responder personnel, the courts held that the event organizer’s insurance only covered “direct physical loss or damage,” not loss of business. Penton Media, Inc. v. Affiliated FM Insurance Co., 245 F. App’x 495, No. 06-4215 (2007).
Be safe – and live up to your side of contracts, even if you need to pay everyone a little versus paying nothing. If you wind up in court, while I can’t guarantee it, this is likely to be looked at more favorably than just throwing up your hands and hiding your head in the sand(bags).
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