Force Majeure Clauses in Commercial Leases in the Age of the Covid-19 Pandemic
The Coronavirus Pandemic has unfavorably affected many Michigan businesses over the past several months. The loss of revenue associated with shuttering a business during this ongoing global epidemic is placing a strain on some commercial tenants’ ability to meet payment obligations under the terms of existing commercial leases.
As a result, force majeure clauses contained in commercial lease contracts have increasingly come into play these days. The term “force majeure” translates literally from French as “superior force.” In business circles, the term describes those unforeseen or uncontrollable events (such as war, labor stoppages, or extreme weather) that are not the fault of any party and that make it difficult or impossible to carry out normal business. A company may insert a force majeure clause into a contract to absolve itself from liability in the event it cannot fulfill the terms of a contract for reasons beyond its control. Most of the force majeure clauses contained in commercial leases temporarily delay or excuse performance of obligations, except for the tenant’s obligation to continue to make its lease and Common Area Maintenance (CAM) payments.
The Covid-19 pandemic has now caused many landlords to add certain language such as “viruses and outbreaks of disease” and “pandemic” into their leases for new tenants and as addendums for lease renewal purposes. Some landlords will essentially allow for extensions of time to pay rent. However, most will not relieve rental payment obligations altogether or allow for rescission of the lease in its entirety.
Of course, problems such as these can work both ways too. If the lease in question is a multi-tenant commercial lease, wherein a landlord may be obligated to provide certain services such as janitorial or security services, under the law it will have an obligation to take “commercially reasonable” efforts to protect the public health of its tenants, their guest invitees, and customers.
The law recognizes that landlords owe a duty of reasonable care as to those parts of the property over which they have retained control (i.e. common element areas such as lobbies, parking lots, stairwells, etc.). Even if a lease does not specifically reference an outbreak of a disease as a force majeure event, commercial leases usually provide that any unexpected and unavoidable governmental action shall qualify as a force majeure event. As such, if there is a government-mandated quarantine or restriction on a tenant’s specific business operations in response to the pandemic, a landlord might claim that such government action is a force majeure event that prohibits the landlord from providing the tenant with access to the leased property.
The tenants’ common law legal defenses to these types of clauses are typically frustration of purpose and impossibility. However, in commercial lease contract situations, some courts are reluctant to impose rescission or abatement of rent, absent the existence of a force majeure clause. In general, here are the typical defensive arguments made by tenants in these situations:
Frustration of Purpose: Changed conditions have rendered the performance bargained from the promisee worthless, not because the promisor’s performance has become different or impracticable. (Such an event will usually occur prior to the bargained for performance).
Impossibility: In extreme circumstances, the doctrine of impossibility relieves non-performance, but the party asserting the defense bears the burden of proving a real impossibility and not a mere inconvenience or unexpected difficulty.
To avoid these types of tenant issues, some landlords are taking extraordinary measures as to the common element areas in their buildings to keep people safe. This includes increased cleaning of frequently touched surfaces; installing hand sanitizer stations in common areas; and displaying education materials informing tenants of proper handwashing techniques and cough etiquette.
For the most part, in these unusual times, both commercial landlords and tenants have sought ways to manage their lease obligations. In the spirit of cooperation, responsible businesspersons have shown that they can work with each other, to the best of their ability, until this health crisis passes.
John D. Gwyn focuses his practice on commercial litigation, real estate law, community association law, and municipal law. He has broad and extensive experience of over 25 years in matters involving commercial and consumer litigation primarily focused on the representation of community associations and financial institutions. Mr. Gwyn currently represents developers, condominium and HOA associations regarding matters involving real estate, contract, and construction issues. He has handled all facets of litigation in matters related to bylaw violations enforcement, collections, corporate civil rights defense and creditor bankruptcy matters. Mr. Gwyn has also spent a significant part of his legal career representing banks and credit unions in proceedings related to compliance, negotiable instruments, construction lien foreclosures, receiverships, fraud litigation, probate and collections. He may be reached at (734) 261-2400 or firstname.lastname@example.org.