Juggling the Costs of Reopening and Litigation: Try Mediation

May 21, 2020 Alerts and Newsletters

State governments are creating paths to restart their economies. Businesses desperately want to start generating income and put the COVID-19 crisis behind them. Companies and their management are closely studying the guidelines issued by the Center for Disease Control and Prevention and other governmental entities, keeping track of their Paycheck Protection Program expenditures with the hope of converting the loan to a grant, and calculating the cost of reopening with all of the new safety measures in place. Combined with other costs associated with getting the business ready to reopen, restarting the business has a high price tag, particularly with limited or no income for months thanks to COVID-19. Still, the opportunity to reopen and start doing business again is exciting, even if there is a bit of trepidation and unanswered questions about the new “normal.” The budget is calculated, a target date is set for opening the doors, everything is moving forward. Then the other shoe drops. The business’s landlord/vendor/customer is threatening to sue for payments due during the shutdown when the business had no income from which to pay rent/invoices/debt service. The added time, expense, and uncertainty of litigation may make it impossible to sustain the business. There must be a better option.

Let’s look at the landlord-tenant scenario. The landlord is understandably frustrated that rent has not been paid in two or three months. The landlord paid the mortgage the first month, was only able to pay interest the second, and month three is not looking good. The tenant, on the other hand, is upset that COVID-19 forced her to shutter the business, and is now facing back rent and eviction for events that were not her fault. She’s been a great tenant for years. Rarely is the rent late, the property is taken care of and very few problems have arisen over the years. Now this relationship is at a serious crossroad with a result that may not be in either side’s best interest. The tenant is at risk of losing the space in which her business succeeded for years, while the landlord is potentially losing a tenant and gaining the uncertainty of finding a new tenant in the midst of an economic crisis. But the rent is months behind, things remain uncertain, and something needs to be done.

The answer during the post-COVID-19 reboot of the economy should be an attempt at early mediation to get the parties on a path that will enable both to succeed. Neither party is responsible for the current situation nor wants to face the uncertainty of terminating the lease. The tenant knows the rent needs to be paid. The landlord knows the tenant, knows the business, and understands that the rent would have been paid had COVID-19 not required social distancing, putting the business on pause. Rather than engaging in expensive litigation that results in an outcome that is bad for both parties, mediation and the exploration of creative solutions is what these parties need. For example, perhaps they can negotiate a resolution that envisions lower rent for a period of time, followed by a period of increased rent which would allow the tenant time to get on her feet while enabling the landlord to ultimately be made whole. Or, perhaps, rent adjustments can be tied to income so that any rent reduction will end when certain benchmarks are met. Indeed, there are any number of scenarios short of eviction that can get this relationship back on track. If none of those alternatives work, the litigation option remains on the table; but before blood is drawn and passions ignited, other options should be explored so that the business relationship can be put back on the successful path it enjoyed prior to the extraordinary circumstances caused by COVID-19.

If you have any questions regarding mediation or have a case you would like to have mediated, contact Verrill attorney and mediator, Jonathan M. Dunitz.