Coronavirus and Force Majeure Clauses: Impact on Retail, Restaurant and Office Leases

Steven M. Lutz

Author: Steven M. Lutz

POST DATE: 3.20.20
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The most current coronavirus pandemic-related question for the commercial/retail real estate leasing industry might be whether force majeure clauses contained in nearly every commercial lease agreement justify a tenant’s suspension of performance of a tenant’s duties under a lease – including the requirement to pay rent or to continuously operate in the leased space. The answer largely depends on the specific lease language and the causal connection between the COVID-19 pandemic and the tenant’s inability to meet the specific lease obligations from which it asserts it should be excused.

What are force majeure clauses?

Force majeure clauses are designed to protect the parties to a contract if a contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care, meaning the cause was not foreseeable. From this perspective, force majeure clauses represent an attempt to incorporate fairness into a contract. Force majeure clauses also attempt to allocate risk between the parties when an unanticipated event makes performance impossible or impracticable.

Disputes over the application of force majeure clauses first require analysis of each lease and the specific language contained in any force majeure clause contained in that lease because lease forms differ substantially from property to property, and even from tenant to tenant located on the same property. The force majeure clause may contain a list of specific events which constitute a force majeure event and/or it may be more vague to include anything beyond the parties’ control. The more specific the force majeure clause, the more limited application it has – if the actual occurrence is not on the specific list of events contained in the force majeure clause, that event will not likely be considered a force majeure event that excuses a party from performance. Some force majeure clauses may contain specific language indicating that they are only invoked when performance becomes impossible; while others may have more liberal language requiring only the hindrance or delay of performance for the force majeure performance excuse to be triggered.

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COVID-19 + force majeure clauses

Because of the COVID-19 outbreak, an increasing number of factors are unquestionably blocking and disrupting commerce, including, notably, governmental action, disruptions in labor forces and interruptions in supply chains, resulting in significant downstream effects. Further, it appears reasonable that broad force majeure provisions mentioning “unforeseeable events” or “events or circumstances beyond either party’s control” cover disruptions in performance arising out of, if not directly caused by, the COVID-19 outbreak. Tenants and landlords should review force majeure provisions of their leases very carefully to determine whether events related to the COVID-19 pandemic are covered under the force majeure provisions of their leases. Because the World Health Organization has declared the COVID-19 outbreak to be a “pandemic,” any force majeure clause containing the broad language referenced above will probably apply and offer a party an enforceable excuse for non-performance. It is unlikely a court would determine that a party to a commercial lease caused or contributed to the COVID-19 pandemic. Some force majeure clauses may even include “epidemic” or “pandemic” in the list of qualifying force majeure events. Even without that specific reference, the declaration of the COVID-19 outbreak as a “pandemic” will likely qualify under most force majeure clauses as a force majeure “event” due to the government-imposed travel bans and quarantines impacting the businesses of retail tenants.

In more standard force majeure event situations, courts could require the party claiming force majeure to prove that the force majeure event was both (i) not foreseeable, and (ii) directly caused the failure to meet its contractual obligations. We do not anticipate any court taking this position with respect to the COVID-19 outbreak because a pandemic resulting in mass closures of all public events, schools and other public gatherings is typically not a normal risk of doing business.

The tenant perspective

As in any commercial landlord-tenant matter, strict compliance with the technical requirements of the lease language may be necessary for a tenant to invoke the benefits afforded to it under a force majeure clause. For example, the force majeure provision may specifically require prompt notice of a claim of the existence of a force majeure event that a party relies upon to excuse its performance under the lease. Courts have rejected force majeure claims when a party has failed to provide notice if required under the lease. In practice, tenants desiring to exercise a force majeure clause in a commercial lease should send written notice to the landlord identifying both the date on which the force majeure event began and the nature of the force majeure event it relies upon. The notice should also indicate precisely what performance the tenant intends to delay during the period of existence of the force majeure event (e.g., continuous operations requirements, payment of rent, etc.).

Some commercial lease agreements may also include the following language, or something similar, as part of the force majeure clause: “Nothing in this section, however, shall excuse Tenant from the prompt payment of any rent.” The purpose of this language is to require a tenant to continue to pay rent to the landlord even if the tenant is excused by a force majeure event from complying with other lease provisions in the event of a pandemic – for example, a continuous operations clause. Under the current COVID-19 pandemic scenario however, a court may find such a clause to be unenforceable as unconscionable and against public policy.

The landlord perspective

With respect to landlords, the existence of the COVID-19 pandemic could trigger a landlord’s right to likewise take advantage of a force majeure clause to excuse performance under the lease. Landlords may argue that the existence of the same force majeure event relied upon by its tenant(s) also excuses the landlord from its obligations under the lease. For example, the landlord may claim that any exclusivity provision contained in the lease is no longer enforceable because of the existence of the force majeure event and to ensure appropriate and necessary tenant inventory and revenue streams. Additionally, the landlord may claim the force majeure clause excuses a landlord from ongoing property maintenance obligations to the extent those obligations are frustrated by the landlord’s inability to collect required CAMs to provide corresponding payments to management, suppliers or contractors.

In the event a landlord receives a notice from a tenant asserting rights under a force majeure clause, the landlord should consult with its legal advisors to confirm whether the force majeure language contained in the subject lease applies to the tenant’s force majeure claim and to evaluate possible responses. Depending on the specific circumstances and the applicable lease language, landlord responses might include: (1) a simple acknowledgment of receipt of the tenant notice without agreeing to the existence of a force majeure event; (2) an indication of the landlord’s willingness to work with the tenant in a commercially reasonable manner during the period of any alleged force majeure event and possibly a proposal regarding rent abatement, extensions, deferrals, amendments shifting from fixed rent to percentage rent, or other appropriate remedies; and/or (3) a statement from the landlord indicating the landlord reserves all of its rights under the lease and applicable law and does not waive any such rights.

Additionally, in the event a tenant subsequently defaults by failing to pay rent (or otherwise) based on the claimed existence of a force majeure event, and to the extent a landlord is obligated to provide notice of any such default to the tenant to preclude a waiver of such default, the landlord should consider issuing a notice of such default to the tenant to preserve its rights.

Navigating the unprecedented

Many lessons will be learned from the COVID-19 pandemic and its impact on businesses in the coming months. Once the initial impact of the pandemic subsides, it will be important for both commercial landlords and tenants to diligently review the force majeure clauses contained in their lease agreements to perhaps more precisely control their respective rights should unforeseeable events like this occur in the future.

Please contact any CCHA Business Services Practice Group or Real Estate Practice Group in the event you have questions regarding any of these issues or desire assistance regarding the review of your existing commercial lease relationships.