Force Majeure Clauses in the Face of COVID-19

by PIDCphila
August 12, 2020

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The COVID-19 pandemic has caused business activity to grind to a screeching halt across the country. Business owners have been unable to generate revenue and some have been forced to close their doors for good.  Business owners may wonder what their rights or liabilities are under certain contracts, such as leases, service agreements, and supplier contracts. If that contract contains a force majeure clause, then it may shed some light on the applicability of the pandemic to the contract. This article explains what a force majeure clause is and under what circumstances a force majeure clause in a commercial lease may be invoked due to the pandemic.

What is a Force Majeure Clause?

A force majeure clause (French for “a superior force”) is a contractual provision that relieves the parties from liability under a contract because a force beyond either party’s control prevents fulfillment of the parties’ obligations. They may also be called “Unavoidable Delay” or “Act of God” clauses and typically provide that, to the extent the force majeure event renders performance inadvisable, commercially impracticable, illegal, or impossible, the affected party’s obligations to perform under a contract may be suspended or excused.

Nearly all commercial contracts, including most commercial leases, contain some form of a force majeure clause. Generally, force majeure clauses contain a list of specific events that constitute force majeure. This can include strikes, lockouts, labor disputes, acts of God, acts of war, terrorism, and terrorist activities. Plus, it can include the inability to obtain services, labor, materials, or reasonable substitutes. There are also governmental actions, civil commotions, fire, flood, earthquake, or other casualty, and other causes beyond the reasonable control of the party obligated to perform.

If a contract is governed by Pennsylvania law, you want to remember that Pennsylvania courts narrowly construe force majeure clauses. As a result, it is best to have more events enumerated in the force majeure provision. The more events that are enumerated, the more likely a court will apply the force majeure language to your specified situation.  Although the absence of a force majeure clause does not prohibit you from using other defenses to enforcement of the contract (such as “impossibility” or “frustration of purpose”), other defenses may not excuse performance like a force majeure clause can.

Does the COVID-19 Pandemic Constitute a Force Majeure Event in Your Lease?

Short Answer: It depends. The language of the contract or lease determines whether COVID-19 falls within the scope of a force majeure event under that agreement. As a result, the application of force majeure should be considered on a case-by-case basis.

If a clause in the contract or lease specifically lists “epidemics and/or pandemics” as a force majeure event, then a court is more likely to find that COVID-19 constitutes a force majeure event because the World Health Organization, the federal government, and many state governments have declared COVID-19 a public health emergency.

What if your lease did not specifically state “epidemics and/or pandemics” are force majeure events? You may still be in luck if your lease provides that any unexpected governmental action shall qualify as a force majeure event. Accordingly, a government-mandated quarantine or restriction on a specific business operation similar to the one instituted at the outset of the COVID-19 pandemic could be considered a force majeure event that prohibits either the tenant or landlord from performing their contractual obligations.

Recently, a court in Illinois determined that the Illinois governor’s executive stay-at-home order constituted force majeure in the context of the COVID-19 pandemic for the first time. As a result, the tenant was relieved from paying a portion of their rent obligation after the governor directed businesses to close in mid-March 2020. Despite the force majeure provision in the tenant’s lease expressly stating that lack of money was not a basis for relief, the court concluded that the executive order to shut down business amounted to a “governmental act,” which was expressly stated in the force majeure clause.

Therefore, the tenant was ordered to pay only 25% of the rent–the portion representing the carryout/curbside business the tenant was still able to operate while the executive order was in place. This is important because courts often look to other states when analyzing an issue for the first time and this Illinois ruling sets a tenant-favorable precedent for analyzing COVID-19 shut downs as “governmental acts,” activating the force majeure provision in a lease.

Additional Items to Consider

Even in the event of force majeure, commercial tenants likely have to pay rent. Commercial leases commonly carve out the obligation to pay rent and other monetary obligations from excusable obligations. It may also state that the tenant’s obligation to pay rent is independent from any of the landlord’s obligations under the lease.

Alternatively, the following non-monetary lease obligations may be excused by force majeure events: co-tenancy clauses (allowing you to reduce your rent if key tenants or a certain number of tenants leave a retail space), go-dark clauses (allowing you to stop operating in your space while continuing to pay rent), and operating hours requirements. 

Additionally, a lease may require a party that wants to activate the force majeure provision to provide prompt written notice of the occurrence of a force majeure event to the other party. Even after providing notice, and regardless of the likelihood that a court would enforce a force majeure provision, each party is required to make reasonable efforts to mitigate damages.

The Future of Force Majeure Clauses

In the future, business owners should ensure that its commercial lease includes “viruses” and “pandemics” within the definition of force majeure and expand the force majeure clauses to excuse or suspend lease payments during the force majeure event. Business owners should strongly consider being represented by an attorney when negotiating and executing any major contract, but it may be even more necessary in today’s environment.  Attorneys spend a lot of time staying abreast of updates to law and best practices, making them a good resource to protect a business owner’s interest while the owner focuses on operating the business in these unprecedented times.

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*** DISCLAIMER: This article has been prepared and published for informational purposes only and is not offered, nor should it be construed, as legal or accounting advice on any specific facts or circumstances. The contents of this article are intended for general informational purposes only and you are urged to consult an attorney, or other professional, concerning any particular question that you may have.


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