The Shift Away from Traditional Commercial Real Estate Leasing

in Business Organizations/Investment/Real Estate/Volume III

By Marquis Cardwell           

The COVID-19 pandemic has caused unprecedented economic and social consequences that have adversely affected how companies operate. Various stay-at-home orders implemented across the country forced companies to cease in-person operations while still being responsible for the obligations under their leases. According to a report conducted by Motus, approximately 11 billion square feet of physical office space was left vacant in March and April, causing U.S. employers to lose $54 billion because of ongoing office costs, such as rent and property management expenses.[1] This financial burden resulted from the numerous government orders implemented to flatten the curve and contain the coronavirus. The substantial burden of current commercial real estate leases has caused companies to consider legal remedies to excuse their obligations under their existing contracts. The ongoing public health crisis and its growing financial impact have accelerated the shift away from traditional commercial real estate leasing toward an evolving workplace dynamic. Given these circumstances during this pandemic, companies of all sizes would be better positioned to overcome their financial burdens by continuing to work from home and not renewing their commercial business leases.

Current Workplace Dynamic

Before 2020, it was a commonly held belief across the country that hybrid or non-office settings would decrease productivity and adversely affect a company’s bottom line.[2] Without warning, COVID-19 challenged this long-entrenched belief, and the shift to working from home occurred swiftly after March 15th, 2020. Despite productivity reservations, according to Global Workplace Analytics, remote working has actually increased employees’ productivity and availability because commutes were eliminated and there is more flexible scheduling.[3] In addition, working remotely allows employees to personalize their work setup and to schedule breaks into their workday. This personalization and flexibility allows employees to create a less stressful and demanding environment, which optimizes productivity and efficiency. A recent study by The New York Times, which surveyed workers from various industries and demographics working remotely, found that 75 percent of remote workers reported that their productivity either stayed consistent or increased since the transition to remote working.[4] The positive reaction from employees and employers alike underscores the ability of businesses to operate without physical commercial real estate.

Furthermore, there seems to be an apparent unwillingness among the workforce to return to the traditional office setting during a global pandemic or thereafter. According to a survey done by the Times and Morning Consult, which represented a wide range of demographics, income levels, and occupations working remotely, 86 percent of employees polled were satisfied with working remotely from home.[5] Uncertainty surrounding social distancing measures and transmission of the coronavirus were leading reasons why workers preferred remote working, and the convenience and quality of life it offers has also increased the appeal. Large and small businesses alike are currently seeking to redefine the traditional work environment, but this uncertainty should not be seen as an insurmountable burden. Adam Segal, CEO and Co-Founder of Cove, a real estate restructuring firm, stated that “[o]ffice demand has drastically shrunk, [and] most companies are in a wait and see mode, … [which] has led to every organization reconsidering the role of the office and its place in the future of work moving forward.”[6]

Segal’s perspective and insight into the commercial real estate market is mirrored by various social and economic assessments. From a social and wellness perspective, the Times and Morning Consult survey reported that roughly 60 percent of people found it easier to focus more on their health and to find time to connect with their families.[7] Additionally, a significant share of the employees polled shared that they incorporated more nonwork activities into their workdays, such as exercising, praying, taking naps, or meditating which have led to decrease in stress levels. On the economic side, researchers have predicted that the U.S. economy would save approximately $700 billion dollars annually if the country integrated remote working only 50% of the time.[8] Specifically, about $500 billion dollars in savings are expected from avoiding the costs of “real estate, electricity, absenteeism, and turnover and productivity” and another $240 billion dollars in savings are expected from an estimated increase in productivity by 5 million work-years and reduced commutes.[9]

Due to these social and economic factors, many companies are or have started to consider shifting away from investing in traditional commercial office spaces. Large companies, such as Twitter and Zillow, have approved measures to allow their workers to move to other cities or states. Twitter CEO Jack Dorsey announced on May 12th that employees will be allowed to permanently work from home even after the pandemic is under control and contained with the option to come into the office.[10] This announcement has caused uncertainty surrounding whether or not Twitter will renew its current commercial leases for its San Francisco Headquarters and other offices around the world. The savings of shifting away from traditional commercial real estate would position companies to reallocate those funds into other areas, such as talent development, marketing, and increasing shareholder value. It is foreseeable that other businesses will replicate a work-from-home alternative, like Twitter has, to create or maintain a competitive advantage in their respective industries.

Legal Remedies and Affirmative Defenses

In order to save costs and reallocate funds into more imminent needs to remain competitive and not fall behind, companies are searching for ways to excuse their existing obligations under their commercial real estate leases because of the closure and lack of use of office space since the start of the pandemic. Many small and large businesses cannot keep up with the financial pressures. During the pandemic, commercial Chapter 11 bankruptcy filings have increased significantly compared to filings before the pandemic. The current total of commercial Chapter 11 bankruptcies filed over the course of the first three quarters of 2020 has eclipsed 5,529, which is 33% more than the filings over the same period in 2019.[11] Further, the threat of loan default has become an increasing problem for businesses because the short-term forbearances that lenders extended are expected to expire throughout 2021.

Companies struggle to uphold their commitments and obligations with the outstanding financial pressures they are facing, especially within the commercial real estate industry. This development has disproportionately caused small businesses to breach their obligations under their existing contracts. Businesses have asserted impracticability, impossibility, and frustration of purpose as affirmative defenses to excuse their non-performance of their leases. The affirmative defenses can be brought forth if there is an unanticipated circumstance that makes performance significantly different than what was anticipated when the contract was originally formed. The coronavirus pandemic seems, on its face, to satisfy the aforementioned conditions to submit the affirmative defenses, but there is a foreseeability element that is being brought forth by defense counsels that could thwart these claims. The foreseeability element is all encompassing in that it considers whether or not an event was unforeseeable given the industry, past occurrences, and other relevant factors. Companies will argue that the pandemic was unprecedented and caused economic and social disruption that could not have been anticipated, However, economic downturns are reasonably foreseeable and there have been prior pandemics such as SARS, Ebola, and MERS that have increased awareness and the possibility of a disastrous pandemic. It is worth noting that these claims and defenses are still being litigated in the courts today.

In lieu of the breach of contract option, businesses should instead look into their force majeure clauses. A force majeure clause is a provision that is triggered when an exceptional and/or unforeseen circumstance is deemed beyond the control of the landlord and tenant that hinders the performance under the lease. California law has recognized that the party may be excused from their obligations under the lease if performance is deemed impossible.[12] However, California courts have held that this interpretation does not apply if the period of impossibility is temporary, but have held that the obligation could be temporarily suspended.[13] In most instances dealing with force majeure clauses, the tenant has been advised to continue paying rent under the contract because COVID-19 is not deemed as a qualifying event. There are numerous lawsuits currently being filed in California citing impossibility because of the stay-at-home orders in order to receive a temporary suspension of their obligations under their leases. In order to bring a prima facie claim, companies will have to prove that their coronavirus business interruption was an unforeseen circumstance that has significantly hindered their ability to fulfill their obligations. In addition, it is important to note that inconvenience or increase in expense of performance are insufficient to claim force majeure because they foreseeable occurrences within the course of business.

Furthermore, there have been lobbying efforts to advocate for the expansion of force majeure clauses to include pandemic related activities. Ronald Richman from Bullivant Houser stated that the consequences of the pandemic will force future commercial leases to involve virus and pandemic protections and expansion of force majeure clauses to excuse or allow delay payments during future pandemics.[14]

Future Outlook on Commercial Real Estate Leases

Moving forward, companies will undoubtedly implement changes to the traditional workplace dynamic to maximize profits and remain competitive in recruitment and retention. As evidenced from the Times and Morning Consult and the New York Times surveys, the unwillingness to revert to the traditional workplace environment will force companies to consider restructuring their commercial leases to resemble the desires of their employees. Given the uncertainty surrounding the scope of force majeure clauses and other legal remedies, companies should also consider downsizing their current commercial real estate and implementing hybrid remote programs to help mitigate their losses. Nonetheless, given the ongoing financial and legal burdens that are still plaguing businesses, companies should not renew their current leases and gradually shift toward remote workplace setups with minimal, or no, physical office space. 


[1] Andrew Martins, How Viable Is a Physical Office Space These Days? Business.com (Aug. 24, 2020), https://www.business.com/articles/how-viable-is-office-space/.

[2] What 10 Influential Fortune 500 CEOs Are Saying About Remote Work, Staffing.com (Jun. 11, 2020), https://www.staffing.com/fortune-500-ceos-remote-work/.

[3] Martins, supra note 1.

[4] Claire Cain Miller, The Office Will Never Be the Same, The New York Times (Aug. 20, 2020), https://www.nytimes.com/2020/08/20/style/office-culture.html.

[5] Id.

[6] Martins, supra note 1.

[7] Miller, supra note 4.

[8] Martins, supra note 1.

[9] Id.

[10] Brian Heater, Twitter Says Staff Can Continue Working from Home Permanently, TechCrunch (May 12, 2020), https://techcrunch.com/2020/05/12/twitter-says-staff-can-continue-working-from-home-permanently/.

[11] Dan Burns, U.S. Commercial Bankruptcies Up 33% Year to Date, Reuters (Oct. 5, 2020), https://www.reuters.com/article/us-health-coronavirus-usa-bankruptcy/u-s-commercial-bankruptcies-up-33-year-to-date-idUSKBN26Q2ZF.

[12] See In re Toyota Motor Corp., 790 F.2d 1152, 1175 (C.D. Cal. 2011).

[13] Maudlin v. Pacific Decision Sciences Corp., 137 Cal. App.4th 1001, 1017 (2006).

[14] Richard Richman, “Force Majeure” and COVID-19: A Commercial Tenant’s Guide, Bullivant Houser (Apr. 2020), http://www.bullivant.com/Force-Majeure-and-COVID-19-A-Commercial-Tenants-Guide.