Force Majeure Clauses
Owners of commercial, industrial and mixed-use real estate need to be prepared for the economic impact of the coronavirus epidemic on their tenants and on their business operations.
Because the applicability of force majeure clauses and performance related provisions are fact and lease specific, owners should carefully review their leases to determine whether provisions exist to provide performance relief.
In general, force majeure clauses address events that are beyond the parties’ control and typically provide that, if an event renders performance impossible or delays performance, the affected party’s performance obligations under the lease may be excused or suspended.
Following is a brief summary of the recurring issues and questions presented to our office:
Does COVID-19 qualify as a force majeure event? Courts have interpreted force majeure clauses narrowly and will only excuse performance if the event that prevents a party’s performance is expressly defined or specified. If the lease’s definition of force majeure includes language similar to pandemic, disease or public health emergency, then the COVID-19 outbreak is likely to be interpreted as a force majeure event.
Does a mandatory governmental shutdown order qualify as a force majeure event? Typically, phrases similar to governmental restriction or regulation are included within a standard force majeure clause and are likely to constitute a force majeure event.
If COVID-19 qualifies as a force majeure event under the lease, obligations relating to performance, not payment, are likely to be excused or suspended such as continuous operation of the premises.
Generally speaking, force majeure clauses often expressly exclude payment obligations of the parties. Unless the tenant has negotiated specific rent offset rights arising from events such as a pandemic or government ordered closure of its business, a tenant’s obligation to pay rent is recognized, under many state laws, as an independent obligation that must be performed without set off, abatement or reduction and is unlikely excused by a force majeure clause.
Before you engage in any significant deviations from the lease, such as restricting access, please contact our firm to assist you in determining what your rights and obligations are based on the circumstances of the pandemic and its impact on the use of the property.
Further, the COVID-19 outbreak will cause an increase in operating expenses. Therefore, owners and tenants should start by contacting our firm for a review of the property’s assessed value and real estate taxes.
