Commercial Real Estate Leases — Force Majeure and the Coronavirus

The coronavirus pandemic, and the governmental restrictions adopted in an effort to slow its spread, have impacted businesses in numerous ways – from required full or partial closures, loss of customers and requisite raw materials, to loss of productivity resulting from employees staying home and potential additional liability to employees and customers who continually interact with each other.  This note will provide some general background on one aspect of this wide-sweeping array of issues – force majeure clauses in commercial real estate leases.

Commercial contracts (including leases) are reduced to written form in order to clearly set forth the intentions of the parties as to the contract’s subject matter.  However, the parties in a commercial relationship recognize that, even with the best laid plans, occasionally a “superior force” will intervene to frustrate the parties’ intentions.  As a result, most commercial contracts (including leases) contain a force majeure clause that outlines what those “superior forces” may be and the ramifications when one of them arises.

In determining whether a force majeure clause covers the coronavirus pandemic and the restrictions surrounding it, or any other significant or catastrophic event, it is important to remember that:

• the force majeure clause is part of the contract, and the language of that clause (i.e., its “four corners”) determines the intent of the parties; and
• because it is in derogation of the general purpose of the contract, courts tend to narrowly construe such clauses.

Therefore, although force majeure clauses often contain a catch-all phrase – e.g., “any other cause beyond the party’s reasonable control” – reliance solely upon such a phrase when invoking a force majeure clause may be problematic.

A careful reading of the force majeure clause is essential.  The following is a fairly typical force majeure clause from a commercial lease I recently reviewed:

Except as otherwise specifically provided herein, if either Lessor or Lessee is [1] prevented or hindered from timely satisfying any provision set forth herein [2] because of a shortage or inability to obtain materials or equipment, strikes or other labor difficulties, governmental restrictions, fire, casualties, acts of God, war or insurrection, terrorism, riot or civil commotion, or any other cause beyond the party’s reasonable control, [3] said party shall be permitted an extension of time of performance by the number of days during which such performance was prevented or hindered; [4] provided, however, that this paragraph shall not apply to the payment of Rent or other monies by Lessor or Lessee, other than to postpone the Rent Commencement Date.

There are four distinct elements (the numbers were added) that must be considered before invoking this defense to non-performance:

1. Was the party (a) actually prevented or hindered in the performance of the obligation (b) by the event in question (and to what extent);
2. Was the event in question one of those enumerated;
3. What relief is available; and
4. Are there any exceptions.

Note that the party invoking the force majeure clause must be able to prove that its particular situation meets all of the aspects of elements 1 and 2.  Also, note that the above clause does not contain a description that might be specifically applicable to coronavirus, such as “disease or epidemic”, although it is likely that this will be added to future leases, as terrorism was added after September 11^th.

Whether force majeure is available to a particular business in connection with the coronavirus pandemic depends not only on the language of the lease clause, but also a myriad of factors including the field, profession or industry in which the business operates, the manner in which it normally operates and how that has been altered, and the state and local jurisdiction to which it is subject.  Thus, there is no “one size fits all answer”; rather, a case by case analysis is required.  In addition, there are other possible lease provisions (such as a contractual requirement to comply with all laws, regulations and public orders), as well as certain common law principles (such as impossibility of performance and frustration of purpose), that might also impact the situation.  Finally, there is the practical situation that, assuming there was no issue with the relationship or lease performance prior to the rise of the pandemic, ending the relationship and the lease benefits neither the commercial landlord nor tenant, so it is better for both if they can negotiate a good faith resolution to see them through the current economic quagmire the pandemic has caused.

If I can be of assistance in reviewing and analyzing your lease, or negotiating with your landlord or tenant, please feel free to contact me.

Andrew J. Hogan is a partner at Kohnen & Patton LLP specializing in commercial real estate law. For more information regarding legal issues during the COVID-19 pandemic, contact Mr. Hogan at 513-381-0656 or ahogan@kplaw.com.