COVID-19 Commercial Lease Considerations for Non-Lawyers

Force Majeure Clause: A force majeure clause is a provision included in contracts, such as commercial leases, to remove, excuse or defer liability for natural or unavoidable catastrophes that interrupt or prevent a party from fulfilling his/her obligations under the contract. In essence, a force majeure clause relieves a party from performing a contractual obligation when such performance was made impossible by causes beyond a party’s control. Force majeure clauses vary from one contract to another. Accordingly, there is not one form/standard force majeure clause, but what is most important to each clause is to examine the terms if the clause very carefully.

Landlords and tenants have historically used force majeure clauses to excuse performance in events such as hurricanes, earthquakes, and floods. Despite the traditional use, the term can be broadened to include other events beyond a party’s control. Courts heavily rely on the definition of the “force majeure” within the terms of the lease to contemplate its applicability. Accordingly, it is critical that the lease include a strong provision which excuses performance in light of a force majeure event for rent payments to be excused. A strong force majeure clause should: (a) be broadly defined; (b) excuse performance in the event of an occurrence; and (c) set forth the parties’ obligations during the event.

COVID-19: COVID-19 has not only affected multiple tenants’ ability to pay rent, but it has also influenced the tenants’ ability to financially recover once the dust settles. While many courts have held that certain events, such as an economic downturn in the market, do not constitute a force majeure, unforeseen events (such as COVID-19) which result in a market decline can certainly be accounted for in a strong lease.

Whether the current pandemic constitutes a force majeure is largely determined by the definition in the clause itself. A force majeure clause which expressly lists events that qualify, such as disease, governmental action, quarantine, and changes in the law will be necessary to make the strongest argument in favor of excusing performance during this crisis and help pick up the pieces in the wake of COVID-19.

Why are force majeure clauses important in light of the recent COVID-19 pandemic? Almost all standard commercial leases contain a force majeure clause. The tenant is responsible for assuring a force majeure clause is in their lease. Failure to have such a provision in a lease removes any defense a tenant may assert in the lease to forgive the payment of rent for any business interruptions involving COVID-19. As a tenant, if a force majeure clause is in your lease, you may be entitled to invoke your rights under the force majeure clause if there is a force majeure qualifying event that prevents you from performing under the lease, including your ability to pay rent. However, in some force majeure clauses, landlords acknowledge that such events may occur, but still state that payment of rent will not be excused during or as a result of a force majeure event, which means that some tenants may still be obligated to pay rent even if a force majeure event has occurred. These carve-outs may apply even if the qualifying event encompasses the current pandemic.

Should I invoke my force majeure clause as a defense to the payment of rent? It depends on what the specific language in the force majeure clause says and the type of force majeure clause you have in the contract. If you have decided to temporarily close the business or elected to take any other action recommended by state and federal officials to help prevent the spread of the virus but which, in turn, has resulted in a reduction in cash flow, these acts likely do not constitute a force majeure unless specifically set forth in your force majeure clause. Financial hardships and temporary business interruptions generally do not qualify as force majeure events.

Does your force majeure clause cover COVID-19? As stated above, the answer depends on the strength and specificity of your particular force majeure clause. A force majeure provision which includes events such as disease or quarantine and possibly, government action (although in the case of government action, the argument is weakest), will generally excuse the non-performance or untimely performance of the party due to COVID-19, allow a tenant to shift their focus from paying rent during this pandemic, and enable tenants to pick up where they left off before the outbreak.

As of March 30, 2020, many state, local, or municipal government authorities have likely issued a “shelter-in place” or similar orders. If these orders are in place in the location where the rental property is located, or if you have been personally diagnosed with COVID-19 and/or have been ordered by a medical professional to self-quarantine, one must analyze these events against the language in the particular lease to determine if the event constitutes a force majeure event. However, the absence of a force majeure clause or the inclusion of a clause that carves out rent payments from being excused for a qualifying event will essentially remove tenants’ ability to make a strong argument in favor of relieving the obligation to pay rent due to the pandemic. To the extent your clause is more specific, the current pandemic may fall under a qualifying event if contemplated by the parties to the lease. All tenants must make sure to follow any notice provisions set forth in the lease to the extent the force majeure clause requires same.

Most Practical Course of Action for Landlords and Tenant. It is recommended that a tenant approach their landlord as soon as practical to request a temporary abatement of rent, especially if the force majeure clause in the lease has a carve-out for rent payments. A 60-day abatement would be ideal. In return, the tenant could offer to extend the lease by 2 months (or longer) on the back end, thus creating an incentive for the landlord. Alternatively, a tenant can attempt to negotiate a reduction in the rent amount. If a tenant and a landlord come to an agreement, it is important to memorialize this agreement in a signed writing to protect your legal interests. Many sophisticated landlords are recognizing that business have been crippled by COVID-19 and are approaching tenants with an eye towards working together to keep businesses open yet at the same time, minimizing harm to the landlord caused by either rent abatement or the payment of the same rent but on a deferred basis. As is the case in all times of conflicts, clear communication is of paramount importance to avoiding costly disputes, including those which must be litigated.

Bankruptcy Considerations involving Commercial Leases. A landlord should have some concerns if they are unable to come to an agreement with a tenant. First, the market remains uncertain and the pool of potential future tenants might be suppressed for an extended period of time. Accordingly, replacement tenants might not be as readily available as before. Next, if an agreement cannot be made, the tenant could always seek bankruptcy protection and assume the lease in bankruptcy pursuant to the Bankruptcy Code. This would give the tenant a little extra time to make up lease payments if they so choose, or to dissolve the entity and be able to only net the landlord pennies on the dollar. Accordingly, it can be more practical for a landlord to enter into an abatement agreement of some duration to avoid all the alternatives that include pursuing a tenant with no assets or incurring legal fees to enforce a lease in the district or bankruptcy courts.

Tips for Communications between Landlord and Tenant. When a tenant discusses rent issues with the landlord, they should be cognizant of what they put in writing. It is important not to imply that the tenant will soon be unable to pay rent or that you plan to stop paying rent, as these statements could have legal effect or at least provide an opportunistic landlord a chance to argue anticipatory breach or termination of the lease on the tenant’s part. One way to avoid this would be to have a conversation for settlement purposes only, even if in a hypothetical sense, to discuss possible options. We recommend that counsel be engaged to assist with that process.

What other options do businesses have? Whether you are a landlord or a tenant, you may also want to consider contacting your insurance carrier to determine what types of coverage you have in relation to business impacts from COVID-19. Again, very few cases, leases and force majeure clauses are exactly the same. Many cases are so fact sensitive that one needs to examine all of the pertinent details for that specific scenario to assess matters and develop a course of action. The Mussalli Firm is here to help commercial landlords and tenants by offering its counsel during the pandemic and “stay home” orders as well as in the aftermath of COVID-19.

Commercial Lease Force Majeure Clause Drafting Considerations after COVID-19. Due to the current pandemic’s impact on many businesses, most commercial tenants and landlords are now aware whether their particular lease contains a force majeure clause which specifically addresses disease, epidemic or pandemic. Largely, tenants are discovering that one of the following scenarios applies to their lease: (1) no force majeure clause is included in their lease; (2) a force majeure clause is included, but it does not excuse or abate the payment of rent; (3) a force majeure clause is included which may call out “acts of God” or other “acts beyond the parties’ control,” but it does not include language that would cover the current pandemic. Accordingly, looking forward, in cases of either renewal of commercial leases or entering into new leases, landlords and tenants alike will negotiate majeure clauses with greater scrutiny, including for considering events for which there is little or no historical basis, just like COVID-19. Parties who once thought force majeure clauses were simply “boilerplate,” or superfluous will reshape their thinking. The Mussalli Law Firm is here to assist both tenants and landlords in the drafting of any new or renewal lease agreements and assisting with navigating these issues.

If you have any questions or seek assistance in analyzing the force majeure clause in your particular lease or drafting an agreement with your landlord or tenant, please contact: