Landlords, Tenants, Leases and Force Majeure During Covid-19
Prepared by Jack J. Kubiszyn
March 24, 2020
INTRODUCTION
The Coronavirus (“Covid-19”) has thrown the United States as well as countries around the world into a state of uncertainty. The World Health Organization has designated Covid-19 a pandemic and The Center for Disease Control and Prevention has issued guidelines to limit the spread of Covid-19. Even state and local governments have taken the unprecedented steps of closing schools, non-essential businesses, and have restricted individuals’ right to travel and to gather in public. Covid-19 is challenging the strength of contracts. In a previous post. Jansen Voss discussed general contracts under Force Majeure. Today we dig a bit deeper to examine the rights of landlords and tenants under commercial leases and the parties’ ability to perform and to meet certain requirements under these leases.
ANALYSIS
Landlords and tenants should be reviewing certain provisions in their current leases previously considered boilerplate to see what relief, if any, they might have or might have to contest as a result of Covid-19 and its impact on business operations. Commercial leases generally contain a “Force Majeure” provision which recognizes that certain defined events cannot be reasonably anticipated or controlled (the “Force Majeure Events”) and as such, these Force Majeure Events justify delaying certain obligations of a party under the lease, without penalty, until the Force Majeure Event subsides. The lease obligations a party might seek to delay as a result of a Force Majeure Event would include obligations such as certain construction deadlines, openings, and operating requirements. Generally, obligations involving the payment of rent and other monetary obligations are excluded from these Force Majeure provisions.
So where should an analysis of one’s commercial lease begin? First, whether a Force Majeure provision allows a party to delay certain requirements or obligations will always depend on the actual wording of the Force Majeure provision. A typical Force Majeure provision delays certain obligations as a result of circumstances created by individuals, such as labor strikes, war or governmental actions and also circumstances deemed Acts of God, such as hurricanes, tornadoes, and earthquakes. The question with Covid-19 in analyzing a Force Majeure provision will generally fall into one of three categories. Does the Force Majeure provision include:
- Epidemic Type Illnesses;
- Government Regulations; or
- Acts of God.
Each of these categories is addressed separately.
1. Epidemic Type Illness
If the language in a Force Majeure provision includes pandemics or epidemic type illness, then Covid-19 would allow certain obligations and deadlines to be delayed under the lease. If this language is not included in the Force Majeure provision, then any right to delay a party’s obligation would have to fall under another category in the Force Majeure provision.
2. Government Regulations
The next category to review in the Force Majeure provision is whether the parties have agreed to delay enforcement of certain obligations due to governmental regulations or restrictions being imposed. Currently, every state and local government has restricted travel, gatherings and the operation of certain businesses in some capacity as a result of Covid-19. These governmental restrictions have undoubtedly interfered with companies’ ability to operate and would apply in this situation. However, even if this language is included in the Force Majeure provision, a factual analysis must still be undertaken as to the effect of the governmental restriction and its impact on the obligation a party is seeking to delay.
3. Act of God
If epidemic type language or governmental regulation language is not included in the Force Majeure provision, then the issue becomes whether the Act of God language is included in the provision, and if so, does the inclusion of Act of God language capture delays caused by Covid-19? Many courts define an Act of God as an extraordinary act of nature such as tornadoes or earthquakes. Causation by humans, even if only as an intervening act contributing to the disruption, disqualifies it from being recognized as an Act of God. Although the cause of Covid-19 results from a group of viruses, clearly nature related, the spreading of the virus from person to person and to other countries clearly constitutes events relating to human activity. How a court would rule on whether Covid-19 constitute an Act of God could very well vary from jurisdiction to jurisdiction and how liberal a court is in its definition of an Act of God.
CONCLUSION
The applicability of Covid-19 to Force Majeure provisions in commercial leases will depend on the actual wording of the provision in the lease. Generally, in order for a party to delay its lease obligation, the language in the Force Majeure provision must specifically reference the type of event in question as courts interpret these Force Majeure clauses narrowly so as to give effect to the purpose of the lease and the parties’ agreement. However, the reality of Covid-19 and its harsh impact on commerce could very well lead to a more liberal analysis of whether the Force Majeure provision applies. For now, Force Majeure provisions in existing commercial leases should be reviewed carefully to determine if Covid-19 might be covered. Commercial leases currently under negotiation and to be negotiated in the future need to pay specific attention to this provision so as to fully address the parties’ rights and obligations and not just treat it as a boilerplate provision.
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