By: Commercial Leasing Group
The disruptions caused by COVID-19 means many individuals and businesses will be unable to fulfill their contractual obligations under their leases and will be looking at any possible mechanisms for relief. This article will examine how force majeure clauses and the doctrine of frustration may impact landlord and tenant obligations in commercial leases.
Force majeure clauses
A force majeure clause is a contractual term by which a party may be temporarily excused or discharged from performing the contract, in whole or in part, when an event beyond the control of either party makes such performance impossible.
Force majeure clauses often include a specific list of triggering events, such as acts of God, war, and natural disasters. Some force majeure clauses expressly account for pandemics, epidemics, or other outbreaks of disease. Many force majeure clauses also include governmental orders, which would likely include the government-mandated closures and initiatives implemented around COVID-19. Nevertheless, the majority of force majeure clauses contain a basket clause that covers events “beyond the reasonable control of the parties.” Therefore, even where a force majeure clause does not expressly list pandemics or government action as a triggering event, it is likely that COVID-19 and the current government orders limiting which businesses may continue to operate will be captured by the basket clause and trigger the force majeure clause.
Once it is determined that a triggering event falls within the contract’s definition of force majeure, the party seeking to rely on the force majeure clause must demonstrate that there is a causal link between the event and the party’s inability to meet its contractual obligations. The party will then need to demonstrate that performance of the contract is impossible (or meets any other standard the clause requires). Unless explicitly provided for in the contract, a force majeure clause will very rarely excuse a party of its contractual obligations simply because it is commercially unreasonable to do so. The party relying on the clause will also need to demonstrate that it took steps to mitigate the effects of the triggering event and to minimize the losses sustained as a result. In addition, some contracts have strict notice provisions that parties must adhere to in seeking to rely on the force majeure clause. Whether or not there is a notice requirement, it is prudent for a party delayed by a force majeure event to notify the other party of the anticipated resulting delay.
Importantly, force majeure clauses typically suspend certain obligations under an agreement temporarily and do not result in a termination of the agreement.
In the context of rent abatements, any discussion of force majeure is likely irrelevant where the lease in question contains a force majeure clause unless the clause specifically states that the occurrence of such force majeure event removes the need to pay rent. Typically, force majeure clauses excuse certain performance by the parties, such as the requirement to provide access to the property or operate at the property during specific hours or in a specific way. However, the force majeure clause does not necessarily eliminate the tenant’s requirement to pay rent. Rent may still be due, without reduction, abatement, or set-off of any kind, depending on the language of the force majeure clause.
The Doctrine of Frustration
Force majeure must be explicitly drafted into a contract in order for a party to rely on it. Where a contract does not contain a force majeure clause, a party that is unable to meet its contractual obligations as a result of an unforeseeable, radical, intervening event may seek to rely upon the common law doctrine of frustration.
Where parties have included a force majeure clause in their agreement, the doctrine of frustration is unlikely to be applicable or available to the parties unless it renders the entire contract incapable of being performed. Rather, the force majeure clause demonstrates that parties have already considered the inability to perform a part of the contract and determined how the risk of any frustrating events may be allocated.
A party may be released of its obligations under a contract by relying on the doctrine of frustration where the occurrence of an unforeseen event, through no fault of the parties, causes a radical change that makes the performance of a contract impossible, impractical, or frustrates the original purpose of the agreement. The fact that it has become more onerous or more expensive for one party is not sufficient to bring about a frustration – the supervening event must make it positively unjust to hold the parties bound. The party alleging frustration has to establish the requisite elements of this doctrine. It is more difficult to establish frustration of contract than to rely on a force majeure clause.
The case law over the long history of frustration indicates that when the doctrine applies, it puts an end to the entire lease or contract. Though doubtful in light of existing case law, it may be that in the current unprecedented circumstances of COVID-19, a court may stretch the doctrine of frustration to apply to excusing the payment of rent on a temporary basis. Unprecedented events do sometimes lead to changes in the common law, as was the case during the Great Depression of the 1930s.
A prima facie case for invoking the doctrine of frustration is established where the frustrating event is not "self-induced", nor of an insufficient duration, nor one which can be nullified by the tenant undertaking reasonable expenditures or alternative measures. Although COVID-19 will likely be considered an unforeseeable, intervening event in many circumstances, it is arguable that the frustrating event will be of an “insufficient duration” to merit terminating the entire agreement. COVID-19 will only likely have temporary implications on most tenants’ ability to operate, where parties have entered into long-term lease agreements. Exceptions may apply, and a stronger case for arguing frustration may exist, where the lease is for a “pop up” shop or a short-term rental.
Ultimately, the terms of the lease will have to be examined thoroughly to determine whether the supervening event has been accounted for and whether the parties allocated any related risks between them when entering into the agreement.
If you have any questions or would like to obtain legal advice on your contractual obligations in the context of the COVID-19 pandemic, please contact any lawyer in our Commercial Leasing Group: Stephen Posen, Michael Horowitz, Christina Kobi, Boris Zayachkowski, Benjamin Radcliffe, Melodie Eng, Steven Birken, Leonidas Mylonopoulos, Catherine Francis, and Ian Cantor.