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Force Majeure Clauses in Commercial Real Estate Contracts
You may be hearing the phrase “force majeure” being thrown around quite a bit in response to the upheaval caused by the coronavirus. But what does this archaic phrase mean for you and your real estate contracts? In short, a force majeure clause operates to excuse performance obligations in an agreement or to extend time of performance when an unforeseeable event, or one that is "beyond the contractor's control," causes one or more parties to be unable to meet their contractual obligations. Given that the coronavirus may well qualify as a triggering event for purposes of a force majeure clause in one of your contracts, we offer the following information, which is geared toward commercial real estate.
Q. Do force majeure clauses impact commercial real estate contracts?
A. Yes. Nearly all commercial contracts, including most commercial leases, contain some form of force majeure clause. Examples of a force majeure include prevention, delays or stoppages due to strikes, lockouts, labor disputes, terrorist acts, acts of God, governmental actions, inactions or delays, civil commotion, extreme weather, fire or other casualty, and/or other causes beyond the reasonable control of the party obligated to perform.
That being said, even in the event of a force majeure, commercial tenants are typically still on the hook to pay rent to their landlords. Many commercial leases include language stating that force majeure may not be raised as a defense for a tenant’s non-performance of any obligations with regard to the payment of rent. Such carve-outs are extremely advantageous for landlords and—absent other possible defenses (see below)—effectively mean tenants will not be able to circumvent rent altogether—or pay lesser amounts—if something out of their control occurs that results in their landlords being unable to perform their duties under any given commercial lease. Of note, the carve-outs also act to insulate landlords from tenants that refuse to pay rent because of a force majeure that prohibits those tenants from entering or continuing their business operations on leased premises.
Rent aside, force majeure usually excuses landlords and tenants from other performance under their commercial leases, but only for a period equal to the prevention, delay, stoppage or inability to perform. And of course, if a commercial lease does not include the carve-out language referenced above, even a tenant’s rent may be subject to a force majeure clause.
Q. Are force majeure clauses enforceable?
A. Yes, but the analysis is fact-intensive and should be considered on a case-by-case basis. Especially important is the precise language of the force majeure clause at issue. As with all contractual disputes, the terms of the agreement (for our purposes here, a commercial lease) and the intent of the parties control a court’s analysis. Force majeure clauses will only limit damages where circumstances beyond the parties’ control have frustrated their reasonable expectations.
Q. Does the coronavirus pandemic trigger the force majeure clause in your contract?
A. Possibly. Again, the inquiry will turn on the specific language in the force majeure clause at issue coupled (potentially) with the governmental orders in place in the jurisdiction where the contract is to be performed.
Most courts read force majeure clauses narrowly, especially those that use unspecific terminology, catch-all phrasing, or the term “act of God.” In fact, the applicable test does not limit triggering factors to “acts of God,” but focuses on the unforeseen nature of the force majeure event and the ability of parties to a contract to have prevented the circumstance if they acted diligently.
However, some force majeure clauses expressly identify “illness,” “disease,” “epidemic,” “pandemic,” or similar terms in the list of triggering acts. In those instances, it is fairly clear that the coronavirus outbreak would activate the force majeure clause and excuse contract performance.
If your force majeure clause does not contain these illness-related terms, it still may be in play. For example, many force majeure clauses are triggered where governmental decrees, laws, or ordinances render performance untenable. Given the influx of coronavirus-related governmental orders prohibiting gatherings of people—such as the San Francisco Bay Area’s shelter in place order—parties to a contract could reasonably lean on their force majeure provision in these instances. Further to that point, parties in California may even argue that the state government has already declared a force majeure event resulting from the pandemic. On March 12, Governor Gavin Newsom issued Executive Order N-25-20, providing, in part, that “state and local public health officials may, as they deem necessary in the interest of public health, issue guidance limiting or recommending limitations upon attendance at public assemblies, conferences, or other mass events, which could cause the cancellation of such gatherings through no fault or responsibility of the parties involved, thereby constituting a force majeure.”
Big picture: while a force majeure provision may be narrowly construed and, under the laws of some states, such as New York and Texas, only triggered where the clause clearly and expressly includes the contingent event, commercial landlords and tenants should understand that even catch-all language making reference to “calamities” or “causes beyond a party’s reasonable control” may be leveraged to their advantage depending upon the circumstances.
Q. Are there other related contract doctrines available as a result of the coronavirus pandemic?
A. Yes, parties to an agreement might be able to assert the defense of “frustration of purpose” and essentially argue that the stated purpose of the contract is frustrated by a governmental prohibition in response to the virus. The case law, at least in some jurisdictions, includes solid precedent as it concerns frustration of purpose based on a government order.
Impossibility of performance is another potential defense to contract enforcement, though not a terribly effective one. This doctrine is construed quite narrowly and usually applied only where performance is objectively impossible, such as where a “thing” necessary for performance has been destroyed. In theory, a party to a commercial lease could argue that it was prevented from performing due to a shelter in place, quarantine, or an isolation ordinance decreed by executive order, but to the extent commercial buildings remain open to provide minimum basic operations and essential business, it is not likely “impossible” for a tenant or a landlord to perform under their commercial lease. This is especially true as it relates to the payment of rent.
It is important to note that in certain contracts, falsely invoking the defense of force majeure or one of the alternative defenses just listed—whether or not in good faith—can alone constitute a breach of contract leading to more potential problems.
Q. Are there any additional concerns and strategies I should keep in mind?
A. In the commercial real estate context, be proactive with your landlord, tenant, or lender. We all are operating in the same uncertain times and landscape, and virtually every business owner understands the economic hardships we all face—your, landlord, tenant or lender included. For instance, rather than waiting until after a payment is late or missed, proactively reach out to those with whom you do business and discuss the circumstances and your options. To that end, consider negotiating modifications and forbearance agreements, which set forth in writing in advance how the parties intend to deal with the pandemic’s impact on their business relationship.
Businesses should also take a close look at tax and cash flow relief programs available to them from the federal and state governments and their respective agencies. For example, the federal government recently announced that it would give taxpayers a 90-day extension to pay 2019 income taxes due on up to $1M in tax owed, which is meant to cover pass-through entities and many small businesses. Commercial landlords and tenants should research sources of financial and tax relief, and discuss the same with their trusted attorneys, accountants, brokers, and advisers.
Please know that we are here to help you in any way we can. That includes coordination with your insurance and real estate brokers, both of whom should be familiar with existing market conditions.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.