July 09, 2020

Understanding and Enforcing Force Majeure Clauses in Commercial Real Estate Leases During the COVID-19 Pandemic

If I cannot operate my business, am I liable for rent? If the government closed my tenant’s business, not me, why can’t I collect rent? These questions face thousands of commercial tenants and landlords during the COVID-19 pandemic. Central to these questions is the meaning and import of force majeure clauses in commercial leases.

What is force majeure?

Force majeure refers to “a superior force” impacting a party’s performance under a contract like a lease. Courts will interpret force majeure clauses in contracts in various ways depending on the language of the clause and the law of a given jurisdiction. In theory, however, the basic purpose of force majeure clauses is to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated. A force majeure clause can often list a series of events such as earthquakes, storms, floods, natural disasters, wars or other “acts of God” which the parties to a contract have agreed upon as excuses for nonperformance.

Force majeure does not cure all tenant default problems during COVID-19

Recently, a court in Illinois interpreted a force majeure clause, determining that a tenant was relieved of some of the tenant’s rent obligations as a result of an executive stay-at-home order. In In re Hitz Restaurant Group, 2020 Westlaw 2924523(U.S.B.C. N.D. Ill. E.D.), a court reasoned that a restaurant tenant that failed to make payments under a lease was liable for unpaid rent that came due before the Governor of Illinois’ order directing the closure of public businesses in mid-March 2020. That is because the order did not interfere with the tenant’s performance under the lease or its ability to perform.

Governor’s stay-at-home order excuses tenant’s post-order rent obligations

However, the court did determine that force majeure circumstances forgave a portion of the rent due after the stay-at-home order went into effect. The landlord argued that the tenant’s argument was tantamount to a claim that the tenant had a lack of money, which the lease’s force majeure provision expressly stated was not a basis for relief. The court concluded, however, that because the order amounted to a governmental act — expressly represented as a possible force majeure event in the lease — the tenant was obligated to pay only that portion of the rent representing the carryout/curbside business that continued during the stay-at-home order. The court reasoned that because the executive order closed the tenant’s in-house dining operations but allowed the tenant to continue operating its take-out service, the tenant was excused from paying 75% of its rent obligations while the executive order was in place.

Unanswered questions

The decision does not answer many questions. How will courts interpret more generally worded force majeure provisions that do not specifically reference governmental action? Similarly, the decision does not address what happens when the effect of a stay-at-home order is less clear. Also, it is not clear how a court would interpret a force majeure provision during the COVID-19 pandemic outside the context of an executive stay-at-home order. Is the pandemic alone sufficient to trigger force majeure modification? Finally, as states begin to allow businesses to reopen, but with restrictions like limitations on capacity, what effect does that have on a force majeure provision? The Hitz Restaurant Corp. reasoning also leaves that question unaddressed and for future consideration.

These kinds of issues abound as commercial rental properties come out of the COVID-19 quarantine. Responding in an informed and decisive manner and understanding the meaning and intent of typically obscure contract provisions like force majeure will be critical for successful tenants and landlords in 2020.

Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.

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