The coronavirus pandemic will affect us in many ways, and we all must be responsible with public health the primary concern, but what do we do with respect to our binding agreements? What do you do when you simply cannot perform for reasons outside of your control? In this post I will briefly review some actions to take from the perspective of a commercial real estate owner or tenant.
In addition to assessing risk, following public directives with respect to employees and limiting liability, the landlord and tenant need to (1) review their insurance policies and (2) review the “force majeure” provision in their lease. Calling your transactional attorney would likely be a good use of resources.
The parties should closely review the insurance policies. What coverage is in place? What are the exceptions to coverage? What deductibles? Can the landlord obtain coverage for remediation or loss of revenues? Would the public closure of a building or shopping center trigger business interruption insurance for the tenant? The policies need to be thoroughly analyzed before contracting the insurance company.
The landlord and tenant should also review the “force majeure” provisions in the lease. Force majeure provisions are usually (but not always) pro-landlord and not heavily negotiated. Think of them as the boilerplate that is usually ignored except in large deals where the tenant has more leverage. The language may or may not include pandemics or public health emergencies as an excusable event.
Typically, a force majeure clause is referring to “acts of God” that are unforeseen and beyond the reasonable control of the landlord and tenant. Because of the force majeure event, the parties are excused from some (but perhaps not all) of the obligations under the agreement. An example could be a storm such as a major hurricane, an earthquake or an act of terrorism. Sometimes the clauses include labor shortages or issues or inability to procure materials, but financial inability is excluded. A good negotiator might try to include issues relating to failures to obtain building permits.
An example of a longer force majeure clause in an office lease is as follows:
In the event that the Landlord or the Tenant will be unable to fulfill, or shall be delayed or prevented from the fulfillment of, any obligation in this Lease by reason of municipal delays in providing necessary approvals or permits, the other party’s delay in providing approvals as required in this Lease, strikes, third party lockouts, fire, flood, earthquake, lightning, storm, acts of God, war, riots, insurrections or other reasons of like nature beyond the reasonable control of the party delayed or prevented from fulfilling any obligation in this Lease (excepting any delay or prevention from such fulfillment caused by a lack of funds or other financial reasons) and provided that such party uses all reasonable diligence to overcome such unavoidable delay, then the time period for performance of such an obligation will be extended for a period equivalent to the duration of such unavoidable delay. Municipal delays in providing necessary approvals or permits, the other party’s delay in providing approvals as required in this Lease, strikes, third party lockouts, fire, flood, earthquake, lightning, storm, acts of God, war, riots, insurrections or other reasons of like nature beyond the reasonable control of the party delayed or prevented from fulfilling any obligation in this Lease (excepting any delay or prevention from such fulfillment caused by a lack of funds or other financial reasons) and provided that such party uses all reasonable diligence to overcome such unavoidable delay, then the time period for performance of such an obligation will be extended for a period equivalent to the duration of such unavoidable delay.
As you can see, a pandemic is not expressly included in the above definition, even in a longer provision. Would a failure to perform because of the coronavirus pandemic be excused under such language? Do the parties need to provide formal notice of such force majeure event before taking advantage of the provision? How does the force majeure event interact with the insurance coverage? These are all questions that need to be answered and that are dependent on the exact language in your lease and the circumstances of this unfolding pandemic.
A declaration of public emergency by a state or an agency such as the World Health Organization would seemingly provide the foundation for a solid argument, but the language will control.
