Empty Offices Open Doors to Litigation Risks

The benefits of working from home, including savings on time and gas, have been increasing in popularity for several years, especially for workers in high-cost metropolitan areas. Accelerated by the onset of the COVID-19 pandemic, remote work has also been a significant driver of the Great Resignation. This growing preference for, and trend toward, remote work in the labor force has been emptying commercial spaces across the country and exposing real estate companies to a slate of new risks while putting underwriters on red alert.

Litigation Risks in Response to Employee Migration

A January 2022 Pew Research Center survey reported that 59% of polled US workers say their job could be done remotely, and the number of employees who have relocated away from their office has gone from 9% to 17% since 2020. In addition, a growing percentage of the workforce is migrating away from major cities to reduce costs and take advantage of lower state and income taxes. Even as spaces begin to re-open, companies are still seeing less than 50% of occupancy in comparison to pre-pandemic levels. Companies that are out of their lease agreements are seeking smaller spaces or scrapping offices altogether.

As rents and occupancy shrink, it actually opens the door to a variety of management liability risks that could lead to litigation. Depending on how a commercial real estate company is structured, vacancies can open the door to litigation from debtors, vendors, and investors, especially for those in publicly traded firms. Failure to meet capital obligations, either circumstantially or because of false projections, puts a target on the backs of the company’s executives. Securing a safety net in the form of a robust management liability insurance policy is increasingly a necessity in this shifting landscape.

Bankruptcies Creating Costly Vacancies

Businesses in both the retail and hospitality sectors have faced major difficulties through the pandemic. Unable to retain employees as they shut their doors due to state and local lockdowns, bankruptcies and closures ran rampant, creating additional financial hardships for building owners. Cash flow is markedly reduced when businesses can no longer pay lease agreements. Similarly, if capital was raised by a public or debt offering, the real estate company becomes liable for that line of credit and debt. Continued rocky economic conditions with rising inflation and the threat of recession will create cash flow pressure on real estate companies to sell spaces for less than their market value, heightening the prospect of litigation.

Staying Prepared to Mitigate Exposures

While fallout from the pandemic presents unique real estate obstacles, it has also instigated new ways of thinking for businesses about how work is performed. The migration of labor to remote work and smaller cities creates new possibilities for real estate. It may be time for companies in the sector to reduce their major metro footprint and begin to follow labor to meet the future of work head-on.

To keep up with evolving trends, commercial real estate companies should seek management liability insurance packages with both D&O (Directors & Officers) and EPL (Employment Practice Liability), as well as begin the renewal process with their broker at a minimum of 120 days in advance. Hold stewardship meetings throughout the year to keep brokers up to speed and have an open conversation with underwriters about current risks. These measures will help build a successful plan for maneuvering through unforeseen challenges and mitigating exposures through this next transitional period.

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