COVID-19: Focus on the Impact on Commercial Leases
Stites & Harbison Client Alert, March 25, 2020
The outbreak of coronavirus disease (COVID-19) has and will continue to significantly disrupt commercial tenants and landlords, especially in the retail, restaurant and hospitality industries. As COVID-19 continues to spread, commercial tenants and landlords will encounter challenges in meeting contractual obligations due to the fluid nature of the outbreak and government responses to the same. Many of our clients engaged in the commercial real estate sector are asking us about the ramifications of theses disruptions, in particular, the impact on lease agreements already in place. One of the primary lease agreement issues we are seeing for commercial tenants and landlords is the applicability of the force majeure clause.
Force majeure is a risk allocation mechanism that considers circumstances outside of the control of the contracting parties, making performance obligations commercially impracticable or impossible. Such clauses address specific or general events that prevent parties from performing the obligations under their lease, but are beyond the parties’ reasonable control. The general rule when it comes to force majeure clauses is that the event in question, which may excuse or suspend performance by either party, must be included in the contract itself. Accordingly, now is the time for commercial tenants and landlords to review their force majeure clauses to better determine the applicability of force majeure in response to COVID-19.
The specific wording of the force majeure clause in a lease is what will determine whether COVID-19 excuses the performance of either tenant or landlord. Look for references to “epidemics,” “pandemics” or “quarantines” in the text of the document, as these will make COVID-19 more likely to be covered by a commercial lease’s force majeure clause. More generalized references to “any Act of God,” “acts of public enemies” or “circumstances not within the reasonable control” provisions are a little less clear as to whether COVID-19 will be covered and the answers will vary jurisdiction by jurisdiction.
Even if an event, such as the quarantine accompanying COVID-19, is specifically covered by a force majeure clause, performance is not automatically excused. Most force majeure clauses will require a direct or indirect causal link between the event and the affected party’s failure to perform under the lease. Notably, many force majeure provisions do not apply to rent or other monetary obligations; only the obligations that require performance. For example, tenant may be excused by force majeure from complying with a “continuous operation” clause, but still must pay rent to landlord.
Parties claiming force majeure will need to provide notification to all other parties of the lease. If you’re considering invoking force majeure, it is important to determine what the notice requirements are and where they are located, either in the force majeure clause itself or somewhere else in the contract. Look for provisions that require a party to state the “anticipated consequences” or expected “duration of the event.” Some leases will require a party to give notice within a specific number of days of having knowledge of non-performance or delay. If unspecified in the lease, notice of non-performance or a delay due to force majeure should be provided to other parties as soon as possible.
Ultimately, all commercial tenants and landlords should review their leases and analyze their positions in the wake of the COVID-19 outbreak, especially if a force majeure clause has already been exercised. If you are a commercial tenant or landlord considering declaring a force majeure event because of COVID-19, you should carefully review your lease agreement prior to doing so and consult with legal counsel.