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The GreeneHurlocker Blog

Rent Concessions in Retail: Taking the Long View and the High Road

retail strip centerIt’s April 1, famous for being a day of jests and frivolity.  However, we’re in the middle of the COVID-19 epidemic and few of us feel frivolous.  In this troubled year of 2020, for landlords and tenants in the retail real estate industry, April 1st has another meaning altogether: It’s the first monthly rent deadline since COVID-19 in the United States really hit the you-know-what.

As a result, landlords have been receiving emails and letters from their tenants — and sometimes, tenants’ attorneys — asking for rent relief.  The requests started coming in earnest three weeks ago and ratcheted up like the virus itself as April 1 approached and sales plummeted.

In a less fraught time, when a particular retailer faces an acute issue like supply disruption, weather anomalies, or other unforeseen difficulties that do not fit into the narrow squeeze of force majeure clauses, a tenant may make a rent relief request.  It could come in the form of  rent abatement (free rent), a rent concession (discounted rent), or rent deferral, which for all practical purposes is a loan.

In such a normal time, if a landlord is willing to entertain a rent relief request, it probably will insist on concessions in return, and will require a written lease modification or forbearance agreement with the tenant.  The landlord will usually insist on deferral, with rent being paid in one lump sum later or amortized over a certain period.  But the landlord may also take the opportunity to go back and renegotiate provisions that were “tenant-friendly” in the lease, such as those giving the tenant the drivers seat in who else can and can’t be a co-tenant in the shopping center and what uses are prohibited.

These are not normal times, though, and this is not a normal April Fools Day.

Retail is where the housebound buyer would have spent her money if she had a job and could move about freely.  Retailers truly need help, because no one – not the landlord, not the tenant — wants rows of desirable stores to be empty in six or eight months.  Proceeding according to “normal” landlord behavior is unnecessary—and unwise.

This is certainly what Gary Rappaport, the founder and CEO of Rappaport, thinks, judging from his comments to over 1500 industry viewers today in a Bisnow webinar entitled “Leadership in Uncertainty.”  Rappaport, the company, is a Washington DC-area retail brokerage and shopping center owner/manager with approximately 1750 tenants in numerous higher-end shopping centers across the Greater Washington area.

450 of those 1750 tenants have already contacted Rappaport with requests for some sort of rent relief.  By the end of this COVID-19 period, Gary expects at least 600 tenants to not be paying rent.  On this first post-COVID-19 rent due date, everyone knows the pain is going to be real, and the pain is going to last throughout the year.   “Plan for this to be a long-term problem,” Gary told his audience today.

Gary is famous in the industry for his unusual availability to offer retail real estate advice to anyone who asks him.  Those, like myself, who have spent even a little time with him can tell that he thinks that doing good is good business.   This is why it came as no surprise to today’s webinar attendees that Rappaport, the company, has told every one of the 450 tenants who have requested rent relief – and will tell all those other tenants that will come to him as they face this April 1 rent due date – that there will be no short-term consequences – no late fees, no defaults, no threats — arising from inability to pay their rent Instead, what Rappaport will say is, “Let’s kick the can down the road 60 days and see where things are then.” Taking dire action now, Gary said, “is not a good business decision.”

Sixty days is a meaningful period of time in a business where landlords, like Rappaport, themselves have mortgages and institutional investors that may not have a huge amount of patience.  Taking rent pressure off the table for 60 days is not a pleasant development.

Ending up with empty stores when the virus abates is not attractive either, though.

We’ve heard this a lot, but it’s what you have to believe, whether you own a shopping center, rent space within it, or work in a store or restaurant:  “We’re in this together,” Gary said today.   “And we’re going to get through it.” If you have any questions or issue related to commercial real estate, leases or otherwise, please reach out to one of our commercial real estate lawyers.

What Employees Can Expect Under Recent Federal COVID-19 Laws

Laura Musick of GreeneHurlocker explains what employees can expect under recent Federal laws enacted in response to COVID-19. Specifics of paid leave for eligible employees are found in the Families First Corona Virus Response Act, the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act. There’s more Department of Labor information here and here.

Clean Economy Act Leads on Renewable Energy

wind turbines and solar arraysAmong the accomplishments of our General Assembly, the Clean Economy Act and Clean Energy and Community Flood Preparedness Act have set a framework to increase momentum in renewable energy development. A lot of the details are in this article from our friends at the Virginia Mercury.

A number of beneficial effects will follow on from these acts and other legislation:

In the solar arena, the two major investor-owned utilities are tasked with constructing significant amounts of new solar generation capacity. As well, the retail PPA pilot cap of 50 MW in Dominion’s territory has been adjusted. Utilities will be under new and significant mandates with respect to energy storage and Virginia is adopting energy efficiency resource standards for these utilities. Off-shore wind projects get a big boost. Plus, there are schedules established for the closure of certain coal and biomass facilities in Virginia.

Importantly, it looks like Virginia is poised to join the Regional Greenhouse Gas Initiative (RGGI), which will facilitate carbon cap and trade. We are closely examining the other effects of energy and business legislation passed in the session and signed into law by the governor. If you have any questions about new or existing laws on energy regulation, development or any business and energy industry issue, please reach out to one of our energy and business lawyers.

COVID-19 Impacts and a Potential Avenue for Contract Relief

pen on a contract documentAs the impacts of the COVID-19 virus spread and more businesses begin slowing or ceasing operations, some by government order, others voluntarily, many businesses are left wondering whether their contracts contain any avenue to excuse their non-performance during the emergency. Most turn immediately to the “force majeure” provisions, hoping to find relief. We have received numerous inquiries from our clients over the past days regarding force majeure clauses. The force majeure term generally lives among the boilerplate terms of a contract, and may not have been heavily reviewed or discussed (if at all) by the parties during contract negotiation. Accordingly, most force majeure provisions take a generalized catch-all approach, which could potentially benefit such an unusual situation as the COVID-19 pandemic.

From a general standpoint, the concept of force majeure is intended to excuse the performance of one or both parties to a contract when that performance is prevented or delayed by some event outside of the control of the performing party. The basic idea is that if a party cannot avoid, prevent, or overcome the occurrence of an event or circumstance that was not foreseen or foreseeable at the time of contracting, the affected party should be excused from any delay that is caused or, in some cases, the party may be excused from performing altogether. In practice, however, the exercise becomes more complicated. Force majeure provisions, like all other provisions in a contract, are subject to negotiation, and while the basic idea remains as described above, the application of this idea in each contract can vary widely. For instance, the term may only protect one party, it may have strict notice requirements, or it may be limited to a specific set of enumerated circumstances. The devil is truly in the details.

Unfortunately, the inquiry does not stop there. Assuming that the force majeure provision in your contract applies to your performance and encapsulates the effects of the COVID-19 virus, the critical question remaining is whether your performance is actually prevented by this emergency. Some cases may be clearer, such as when your business is ordered by a local, state or federal agency to cease operations. However, many businesses have not yet received such an order, meaning their cases for force majeure relief are murky.

In either case, the two key factors to consider are (1) what type of performance is required and (2) is the direct cause of non-performance outside of the party’s control? The answers to these questions are, unsurprisingly, dependent on the particular circumstances of each case. Some businesses may be directly prevented from performing under one or more contracts. Many businesses, however, may be left in a tough position where performance is possible, but is neither advisable nor profitable. While there may be other avenues for relief in certain circumstances, the best course of action in this situation may be to open a dialogue with your counterparty with the goal of clarifying (and properly documenting) that that anticipated impacts of the COVID-19 emergency will be treated as force majeure impacts.

As mentioned above, the impact, and potential avenues for contractual relief, arising from the COVID-19 emergency will depend greatly on the particular facts of each situation and, as is generally the case, there is no one-size-fits-all solution. In order to discuss the impacts of the COVID-19 emergency or the particular circumstances of your company’s situation, please contact one of the corporate and transactional attorneys at GreeneHurlocker.

Duties of Loyalty for Corporate Board Members versus LLC Managers

Limited Liability Companies (LLC’s) are functional and flexible forms of ownership for operating companies as well as investment vehicles. As common as LLC’s are today, we ought to remember that relative to other forms of legal entities, LLC’s are still very new. It was only as recently as 1996 that all fifty states had enacted limited liability company statutes, so in many states these forms of ownership are less than 30 years old. For instance, the Virginia Limited Liability Company Act (VLLCA) was only originally passed in 1991, making it only 29 years old. Thus, the body of law governing LLC’s is much less robust than that of corporations or partnerships.

Twice in the last few months, we have been asked by clients to look into issues regarding the duties of managers of a Virginia LLC, and it’s illustrative of a key difference of the two entity structures, and the much smaller body of case law regarding limited liability companies versus corporations. The key statutory provision outlining the duty a director owes a corporation is Virginia Stock Corporation Act (VSCA) Section 13.1-690, which states that “A director shall discharge his duties as a director, including his duties as a member of a committee, in accordance with his good faith business judgment of the best interests of the corporation.” The key statutory provision outlining the duty a manager owes a limited liability company is VSCA Section 13.1-1024.1, which states that “A manager shall discharge his or its duties as a manager in accordance with the manager’s good faith business judgment of the best interests of the limited liability company.”

They seem almost identical, right? Perhaps, but a body of case law in Virginia has confirmed that corporate directors have a common law duty of care and a duty of loyalty to the corporation underpinning Section 13.1-690 (See Willard v. Moneta Bldg. Supply, 515 S.E.2d 277 (Va. 1999), Feddeman & Co. v. Langan Associates, 260 Va. 35, 530 S.E.2d 668 (2000), Simmons v. Miller, 261 Va. 561, 544 S.E.2d 666, (2001)). In contrast, there is no case law in Virginia establishing a common law duty of loyalty by managers to the LLC. To the contrary, limited case law applying Virginia law indicates that managers affirmatively do not have a duty of loyalty to their LLC. (See In re Virginia Broadband, LLC, 2014 BL 313170 (Bankr. W.D. Va. 2014)).

The VSCA also contains Section 13.1-691, titled “Director conflict of interests”. Section 13.1-691 defines certain transactions that would cause a conflict of interest with a director, and creates something akin to a safe harbor for a corporation’s board of directors engaging in such a transaction if certain information is disclosed and certain procedures are followed. While this statute does govern specific acts of potential self-dealing, the duty of loyalty of a director to their corporation is more generally governed by Section 13.1-690 and the common law described above. Stated differently, while Section 13.1-691 only covers transactions between a director and their corporation, the general duty of loyalty underpinning Section 13.1-690 covers a far broader set of possible actions by a director. (See Goolsby & Haas on Virginia Corporations, 6th Ed., Section 9.8, p. 247).

Despite this seemingly large gap of protection for limited liability companies, all is not lost. Another major difference between corporations and limited liability companies is the flexibility, as mentioned at the top of this post, that LLC members may contract, via an operating agreement, for a set of governance provisions customized to their specific needs, as long as those contracted provisions do not violate the Virginia Limited Liability Company Act. The members could agree that managers have a duty of loyalty to the LLC, and they could also define its parameters. They could choose to limit the duty of loyalty to the equivalent of Section 13.1-691 of the VSCA, or they could state that managers are subject to the same standards applicable to directors of a corporation.

It is very important to note that these comments are only applicable to Virginia LLC’s and the law applicable in other jurisdictions may be quite different. For instance, in Delaware, by far the most popular jurisdiction for forming LLC’s, the default rule is the complete opposite. In the absence of a provision in the operating agreement to the contrary, managers and controlling members of an LLC owe a duty of care and a duty of loyalty to the LLC. (Delaware Limited Liability Company Act, Sections 18-1104 and 18-1101(c)).

The examples described in this post is just one of a number of important considerations when forming a limited liability company. Do not rely on a form downloaded from the internet. The corporate attorneys at GreeneHurlocker commonly assist clients with the formation of corporations, limited liability companies and partnerships, so please contact me or one of the other members of our corporate team to discuss these issues if you are considering forming a new company.

C-PACE Expansion On Governor Northam’s Desk

Lost in the excitement and debate about the Virginia Clean Energy Act (we talked about it here), a number of other clean energy and energy efficiency bills have been winding their way through the General Assembly. One bill in particular that has flown under the radar is House Bill 654, which amends the Virginia C-PACE enabling legislation to empower the Department of Mines, Minerals and Energy to develop and administer a statewide program for C-PACE. HB 654 has now passed both the House and Senate and awaits signature by the Governor.

C-PACE, which stands for Commercial Property Assessed Clean Energy, is an innovative lending program now active in over 20 states including parts of Virginia, which provides long-term financing for renewable energy, energy efficiency, and resiliency upgrades for commercial buildings. C-PACE loans are repaid via a special assessment on the property tax bills and can often finance 100% of eligible improvements. For a summary of C-PACE, where its available, and how it works, check out https://pacenation.org/ and https://virginiapace.com/.

C-PACE has been enabled in Virginia since 2009, but because the financing mechanism involves special assessments on property, to date, each local jurisdiction is required to pass enabling ordinances to enable the assessment changes, and then implement the necessary changes to their property tax systems. Currently, eight Virginia jurisdictions have passed enabling legislation and are in various stages of implementation, including some of the largest in the Commonwealth, including Fairfax, Loudon, Richmond, Petersburg and Fredericksburg. (See chart below, courtesy of our friends at the Virginia Pace Authority.)

The change provided by HB 654 will create a state wide program that any jurisdiction can opt into. This will streamline the process, provide a more centralized mechanism for promoting the program, and allow smaller jurisdictions, who may not feel that they have the resources to implement and manage such a program, to avail themselves of the same benefits that larger jurisdictions have gleaned from C-PACE.

Once passed, the Department of Mines, Minerals and Energy will engage a private entity through a competitive selection process to run the program. This is an exciting development for energy efficiency efforts in the Commonwealth, and we are hopeful this legislation will become law. Check back here for more developments on C-PACE and if you are interested in learning more about how you can take advantage of C-PACE where currently available, contact Andy Brownstein or any of our Virginia energy lawyers.

 

Locality Status (as of Dec. 17, 2019) Program Details
Arlington County Active Launched in Jan. 2018, Arlington C-PACE is the first active program in the state. Sustainable Real Estate Solutions is the program administrator.
City of Fredericksburg Active Fredericksburg enabling ordinance passed Dec. 2018. City intends to self-administer program initially, and staff considers the program to be active.
Loudoun County Active Loudoun County and program administrator Virginia PACE Authority (“VPA”) launched program in November, 2019 late 2019.
Fairfax County Active January 2020 Fairfax County selected VPA as its program administrator in November, 2019. Program launch anticipated in early 2020.
City of Petersburg Active January 2020 Ordinance passed on July 3, 2019. City rode Loudoun County’s contract with VPA in August.
City of Richmond Ordinance enacted City Council passed ordinance on November 12, 2019. Program to be launched by mid-2020 per ordinance requirement.
City of Alexandria Ordinance in development Funding to support ordinance/program development approved April, 2019. launch of program anticipated in mid-2020. Anticipated public comment on ordinance in January 2020.
Town of Dumfries Ordinance enacted City Council passed ordinance on December 3, 2019. No further info is available regarding if they are issuing an RFP or riding a contract with another locality.
City of Lynchburg Ordinance enacted City Council passed ordinance on December 10, 2019. No further info is available regarding if they are issuing an RFP or riding a contract with another locality.

 

Virginia Senate Kills Bills to Expand Electric Choice for Renewable Energy

The Virginia Senate Commerce & Labor Committee rejected two bills on February 24, 2019 that would have allowed customers of Dominion Virginia Energy and Appalachian Power Company greater access to purchase renewable energy from an entity other than their electric utility. Customers and competitive service providers (CSPs) had lined up to support the bills, which passed the House two weeks ago.

The Senate C&L Committee a few weeks ago rejected similar bills that originated in the Senate, but the House versions passed. As a result, virtually identical bills found themselves back before the same Senate C&L Committee for consideration.

Currently, in Section 56-577 A 5 of the Code permits customers to purchase electricity provided 100% from renewable energy from CSPs but only if the customer’s incumbent utility does not have a 100% renewable energy tariff.  HB 889 would have modified that language to allow CSPs to sell, and customers to buy, renewable energy even if the utility has such a tariff. About two years ago, the State Corporation Commission approved APCo’s 100% renewable energy tariff, so APCo customers who desire a renewable product must purchase it from APCo.  Dominion’s 100% renewable energy tariff is currently pending before the Commission.

HB 889 would also have : (1) shortened from five years to three years the period that a large (+5MW) customer who switches from a utility to a CSP under Section 56-577 A 3  is barred from returning to utility service; and (2) made it easier for customers to aggregate their loads to reach the 5 MW threshold. The Senate Committee voted 8-6 (with one abstention) to pass the bill by indefinitely. It had passed the House 56-44.

Second, HB 868 was basically a scaled-down version of HB 889, addressing only the Section A 5 modifications.  Gov. Ralph Northam had backed HB 868, which passed the House on a 55-44 vote. The Committee voted 10-4 to continue the bill to 2021.

Larger customers such as Target and Costco lobbied for these bills, explaining that they could purchase renewable energy and lower their carbon footprint at a price cheaper than Dominion’s current price which is not a renewable product. Dominion and APCo argued in response that while shopping under Section A 5 might benefit those who shopped, the utilities’ remaining customers would be left to pay the costs that the shopping customers no longer had to pay. During the last two General Assembly sessions, similar bills failed to make it out of committee in each chamber, so the proposals made it farther this year than in prior years.

Progress on Virginia’s Clean Economy Act

The folks at  Virginia Mercury carried a nice summary today about the pending Virginia Clean Economy Act [ht to RichmondBizSense for pointing this out for us], one of Governor Ralph Northam’s signature efforts for this year’s General Assembly. We’re following its progress carefully.

If you want to know more about he Virginia Clean Economy Act or anything about energy issues in Virginia or the mid-Atlantic, simply contact one of our Virginia energy lawyers.

Energy Bills to Watch at the Virginia General Assembly This Session

The Virginia Clean Economy Act (HB 1526) would replace Virginia’s voluntary renewable portfolio standard with a mandatory renewable content requirement for electricity sales that will scale up to require 100% of electricity sold in Virginia to come from renewable sources by 2050. A report by the Maryland Delaware Virginia Solar Energy Industries Association and the Center for Urban and Regional Analysis at Virginia Commonwealth University projects that 2,500 MW of new distributed solar energy (which would be authorized under the Act) could result in over 29,000 direct solar jobs in Virginia and $4.3 billion in economic investment. This bill has cleared both the House and Senate Committees and is up to be voted on tomorrow on crossover day.

HB 889 is another energy bill to watch. If passed, customers would be able to purchase renewable energy from a competitive supplier, expanding a limited shopping option under current law if a customer’s utility does not offer a renewable energy option. This legislation would reduce the time that customers shopping for electricity with a completive supplier must wait before returning to utility supply service. There is also a provision in HB 889 to expand consumer protections for retail electricity consumers, including development of a consumer education website, reporting on customer satisfaction, and additional enforcement to address any “unscrupulous activity in making sales to retail customers.”

There are other energy bills under consideration this session. With crossover day tomorrow, we will have a better idea of what legislation will be moving forwards this session.

If you have questions about energy legislation in Virginia or other issues impacting the retail energy and renewable energy industries, please contact Eric Wallace or any of GreeneHurlocker’s Virginia energy attorneys for more information.

Ideas Are Just That: Part 3

We’ve been sharing a series of blog posts and videos here and here about how an idea is just that: an idea, and how there are some basic, critical things a high-potential start-up technology company founder must do in order to make any idea worth having and building upon. As I said in my first post, the fact is, most ideas suck. So a founder needs to be sure this idea is worth making it the most important thing in her life for the next months or years.

My third suggestion for the immediate post-idea step is: Focus obsessively on creating a minimally viable product.

Don’t get caught up in the romance of the wonderfulness or inevitability of your idea, the greatness of your team, or the exuberant free feeling of having decided to jump in with both feet. The fact is, you haven’t yet accomplished the whole reason for doing this in the first place, which is selling something to people who want to buy what you have to sell. The excitement is going to wear off and then it’ll be time to get to work. If you don’t get to work immediately, you probably will have lost your opportunity.

It is all about speed.

Too many startups begin with an idea for a product that they think people want. When it isn’t resonating with customers, it is often because the founders never spoke to prospective customers and determined whether or not the product was interesting. When customers ultimately communicate, through their indifference, that they don’t care about the product, the startup fails.
The truly most important question you need to start asking yourself is the following. It’s the first thing you should ask yourself even before you swing your legs off the edge if the bed to get up on the first morning after to you come up with your great idea.

“Should this product be built?”

And then, soon thereafter, maybe before you brush your teeth, you need to ask “Can we build a sustainable business around your product?’
At this point it’s really only about two things: a first product that you know the world needs, and a plan for how first product can actually get customers. The team needs to be focused brutally on these things. Let the customers be your source of accountability.

The new company should be focused on quickly developing a minimally viable product and then learning as much as possible about its weaknesses and opportunities for improvement. Iteration upon iterations, pulling your hair out from anxiety that you’ll never get it right, near-all-nighters and lost weekends — all of that fun stuff. The point is to do all of this on the front end, quickly, and always being in dialogue with the customer, not stuck in an echo chamber of a founder team that may be overly enamored with the original concept.

When a founder focuses on figuring out the right thing to build—the thing customers want and will pay for—she need not spend months developing a prototype or waiting for a beta launch to change the company’s direction. Instead, she can adapt her plan incrementally, inch by inch, minute by minute, moving fast, boxing out the competition.

A couple of years ago I spent three days in the James Madison University’s Icehouse facility with about 24 entrepreneurs who had agreed to lock themselves in and spend that whole weekend developing companies based on pitches that they made on the first night. These people , for the most part, had never met each other. Groups coalesced around about eight ideas big and small. Through the weekend there was a compressed process of honing the original idea and creating a business plan and readying the product or service for the launch. I remember several of the teams were stumped by this question: Will customers want this? Only one of the groups spent the first night doing customer demand research – one group had thought to do this out of eight. That may be somewhat reflective about what real companies do when they go out into the real world. I hope not.

The founding team members need to relish being sponges for crucial information gleaned from the only people that matter: potential customers. This is never more true than at inception and in the earliest weeks and months.

Watch for our next post on “Ideas are just that.” Meanwhile, if you have any questions about startup steps or business law, just reach out to me or any of our Virginia business lawyers.