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COVID-19 and Force Majeure Main Photo

COVID-19 and Force Majeure


Commercial Leases often have force majeure clauses, but what do they mean?
Posted: June 12, 2020 by Anna Jotham

Force majeure doctrine is something that often appears on commercial real estate leases, but tenants and landlords may quickly disregard it — it's not something we have to lean on typically, and the topic doesn't come up very often. Force majeure clauses in commercial leases are called upon in extraordinary times, when circumstances beyond our control arise and wreak havoc on our ability to follow through on contractual obligations.

As tenants and landlords alike begin to eye our current reality and post-COVID-19 future warily, and as health care professionals and epidemiologists warn about the possibility of a second wave of mass infections, the time is clearly right to brush up on what these force majeure clauses mean for all parties involved.

Force majeure: for no-fault events, like COVID-19

A global pandemic may be perceived as an unforeseeable emergency, no doubt with long-term consequences. What do both commercial landlords and tenants need to know about force majeure provisions in the age of coronavirus, and how can they protect their rights? Let's take a closer look.

 

Review your lease

As coronavirus-related fallout is sure to have an impact on every business’s ability to operate normally due to social distancing requirements, government regulations and more, the first step to understanding your rights in these challenging times is to carefully review and understand your lease. In addition, it's also prudent to gain input from a trusted legal advisor. Only when you have a full picture of the legal agreement can you proceed.

 

Rights differ, depending on the clause — check the language

Depending on the language of the contract itself, the current public health and economic crisis may or may not qualify as force majeure. Determination may have to be made by the courts, which have traditionally defined force majeure narrowly — if a specific incident is named, it is more likely to be covered by the provision. If your clause lists among its qualifying force majeure events terms like pandemic, outbreak or disease, the likelihood of the event being declared force majeure is greater. Government mandates that call for businesses to close, limit customers or put other restrictions into place, may also be covered by force majeure clauses if terms related to such limitations are specifically included.

 

Contractual obligations may or may not be suspended

If the COVID-19 event falls within the force majeure definition, it's possible that contractual obligations of the lease could be suspended, depending on what your lease allows. This is of note as businesses during this time are forced to change their operating models, have employees work from home, pause operations or close entirely during lockdown. Some force majeure provisions allow for deadline extension, suspension of contractual obligations or excuse from the obligation to perform. Know that tenants may or may not be excused from paying rent if the force majeure clause addresses payment specifically.

Economic hardship is likely for many businesses under the existing conditions and with the future so uncertain. It's important to note that courts have typically not excused tenants of the obligation to pay rent if they had some control over their resources, even in the event of financial hardship.

 

New environment and commercial leases

In this new environment, commercial landlords and tenants everywhere will be forced to decide how to proceed. Many will make the decision to work together and come up with creative solutions to the financial hardship businesses may face. Among the options: rent deferment or reduction, insurance coverage or creative use of security deposits. Through a series of shorter-term solutions, it's possible both tenant and landlord may emerge from this crisis undaunted and strengthened for the collaborative road ahead.

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