Contracts in the Time of Covid

2020 has been a strange ride, hasn’t it? The pandemic exposed our divisions and we’ve experienced unprecedented fear, isolation, frustration, helplessness and stress. Regardless of how you lean politically, whether you think it’s a “hoax,” whether you disagree with the mask mandate or you want to blame any politician or group, or if you subscribe to any conspiracy theory, it’s here and our lives have changed dramatically – these realities transcend all our differences.

This article discusses how the pandemic has affected some of my small business clients. Nobody anticipated a global pandemic in their contractual dealings, so we’re all playing catch up with ill-fitting contracts. Since March I have counseled a diverse range of business owners about challenges caused by the pandemic and have learned much. In a moment I will share case studies of people whose contracts needed work, but there are two main themes:

Everything is Negotiable

Don’t worry if a contract says it is not cancelable or how well written and thought out it is. Every term is negotiable and if you disagree with a clause there is no harm in asking to modify or delete. Even if you are halfway through a contract term, changed circumstances might cause the parties to rethink their contract.

Don’t be afraid to negotiate or renegotiate. It is in the other party’s interest to modify the contract instead of seeing it breached and abandoned. Given our present limited access to the judicial system and the potential difficulty in finding someone to replace you in the contract, the other side has a strong incentive to be reasonable and work with you. This brings me to the second point.

Be Human in Your Business Dealings

Sometimes you might ignore or waive certain contract terms. Maybe you are legally justified standing on your contract, but should you? The other party in your contract is a person; even if it’s a corporation, corporations are owned and operated by people. Altruism aside, being ethical and compassionate in your business dealings is actually good business.

First, it’s the right thing to do. Second, it can be profitable in the long run because compassion is conducive to fostering relationships, loyalty and good will. 

cASE sTUDIES

The following are quick case studies in some of the contractual issues I’ve encountered with clients since the pandemic hit.

The Private School
I was contacted by the owner of a private school early in the outbreak, before schools had converted to remote learning. We reviewed his contract in anticipation of parents asking about cancellation. The contract did not contain a force majeure clause and had no provisions about a pandemic (why would it?) and it did not allow mid-semester cancellation.

I concluded that he would be within his rights standing on the contract if someone wanted to cancel, but offered a word of caution. 24 Hour Fitness continued charging monthly dues even though its gyms were closed by the stay at home order. It was a public relations disaster, customers revolted and sued, and the company went bankrupt.

I advised the owner to consider the optics of refusing cancellation during a pandemic while the school is closed and parents are out of work. Parents talk with other parents and one aggrieved person could quickly inspire others.

School since shifted to remote learning, for better or worse, so the school remains open. I am now modernizing the contract to align with the times and to factor in remote learning. 

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The Wedding Service Vendor
I wrote a service agreement for a wedding service vendor years ago. Deposits are non-refundable because the vendor blocks out the date. Standard language in the industry.

The vendor now has brides requesting refunds because venues are closed and nobody is getting married right now. I advised that she would be within her rights to stand on the contract and retain the deposit, but asked, “Do you feel that is the right thing to do?” She said No. These are my kind of people.

As with the school and the gym, business owners must be mindful of the optics and be flexible and compassionate. Sometimes you must forego immediate revenue for a long-term return. We decided to retain a portion of the deposit as an administrative fee and to refund the rest. The bride was appreciative and the vendor’s reputation was enhanced. 

If someone has been paid a deposit to provide a service, then circumstances outside everyone's control renders it impossible to provide the service, then return the customer's money. Keep some percentage to cover your admin or out of pocket costs, communicate that, then issue a refund. Don't keep someone's money for a service you cannot provide.

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The Retailer
A retailer’s business was hit badly by the pandemic. While it still processes orders online, the pandemic caused a sharp reduction in demand for its products. The retailer couldn’t afford its lease and needed to renegotiate.

The landlord presented us with a draft rent deferment amendment. I reviewed and explained it to my client and identified areas of concern. Some clauses were fine, some were unreasonable. The lawyer’s role is to spot issues and ambiguities and identify language that should be revised or deleted. Ultimately the client makes the business decision whether to sign.

We pushed back to negotiate better terms, but landlords are reticent to have different terms for different tenants. They want uniformity among their leases, and as with parents at the school, tenants might share details of their terms, and that can complicate things.

On the other hand, no landlord wants empty inventory and the court system is slowed down and backlogged significantly. Trial dates are being set way out in the future, so litigants are having to work things out between themselves. A landlord is better off having a tenant paying reduced rent now, and recoup the lost rent later in the lease, than having a tenant simply break the lease and move out.

In this sense, tenants have leverage they lacked previously. Breach of contract and breach of guaranty claims are dischargeable in bankruptcy and vacancies are hard to fill. These conditions are fertile ground for renegotiating.

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The Gym Owner
A gym owner was nearing completion on tenant improvements (TI) and making plans to open when the pandemic hit. The parties amended the lease to extend the rent commencement date and the amendment process was smooth.

The problem is nobody knows what the future holds here. When the state was beginning to ease restrictions in June, we discussed how some people are itching to get back into the gym (myself included), while others, especially the elderly or those with compromised immune systems, would go nowhere near a gym. It was impossible to project membership, revenue, or how long the facility would run in the red.

It was also impossible to know how long the gym would be allowed to stay open. The gym agreed to start paying rent on a date certain, but what if the governor shuts it down again? A month later, that’s exactly what happened. What do you do when circumstances outside your control change your plans? You adapt. You renegotiate. 

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I could provide more examples from different industries, but the common theme is that nobody’s contract, whether a lease or service agreement, contemplated a global pandemic. If a contractual relationship isn’t working out for one or both parties to a contract, it’s in both sides’ best interest to work together (preferably through counsel) to find a compromise.

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