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Real Estate Alert: Can the COVID-19 Pandemic Trigger a Force Majeure Provision in Commercial Leases to Excuse Payment?
By Thomas A. Gattozzi on March 31, 2020
As the COVID-19 pandemic continues to worsen across the country, every business has been impacted in some way. To slow the spread of this virus, several states and local governments have issued orders requiring non-essential businesses to shut down. With businesses closing their doors, cash flow for many companies has come to a halt, making it difficult to satisfy payment obligations—including rent payments under lease agreements. The question now is whether a force majeure clause in a commercial lease would excuse payment under the current pandemic situation.
In order to answer this question, the parties must look to the precise language in the lease to determine if the lease contains a force majeure clause. A force majeure clause is a provision in a contract that allocates “the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” FORCE-MAJEURE CLAUSE, Black's Law Dictionary (11th ed. 2019). Generally, force majeure clauses will list or describe certain events that trigger the provision and, consequently, excuse a party from performing its obligations under the contract. Stand Energy Corp. v. Cinergy Services, Inc., 144 Ohio App.3d 410, 416, 760 N.E.2d 453, 457 (1st Dist.2001). Typically, these provisions provide that “acts of God” (e.g. a hurricane, earthquake, fire, etc.), terrorism, or wars excuse performance under the lease. The clause may also state that certain government acts (like eminent domain) excuse the performance of a party. The provision might not, however, explicitly list a pandemic as a force majeure event. In addition, in some circumstances, the force majeure provision in the lease specifically states that it does not apply to the payment of rent or other monetary obligations under the lease. While courts typically have limited force majeure clauses to the express language in the contract, unclear or broadly worded provisions will give both parties significant room to advocate whether related COVID-19 events fall within the provision.
In connection with the COVID-19 pandemic, the non-performing party may be able to argue that at least two events fall within the force majeure provision: (1) that the pandemic itself fits within this provision; or (2) in states where the government has ordered that non-essential businesses cease operations, that the government mandate constitutes a force majeure event. Determining whether either of these events trigger the force majeure provision will largely rest upon the contractual language. In cases that lead to litigation, the non-performing party has the burden of proving that the event was unforeseeable and that it “was beyond the party's control and without its fault or negligence.” Id.
In interpreting the contractual language in your lease, please contact your Brouse attorney with any questions. In addition to the strict contractual language, there may be other arguments under state common law that implicate whether a party’s non-performance is excused, if the contract does not contain a force majeure provision. Finally, a more practical approach may be available to resolve any existing disputes as to whether rent payments should be excused, especially given that several courts across Northeast Ohio (and presumably across the country) have postponed eviction hearings as result of COVID-19. In addition, several courts have postponed hearing dates. As such, landlords will likely have a difficult time evicting tenants for non-payment of rent until things normalize.
In order to answer this question, the parties must look to the precise language in the lease to determine if the lease contains a force majeure clause. A force majeure clause is a provision in a contract that allocates “the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” FORCE-MAJEURE CLAUSE, Black's Law Dictionary (11th ed. 2019). Generally, force majeure clauses will list or describe certain events that trigger the provision and, consequently, excuse a party from performing its obligations under the contract. Stand Energy Corp. v. Cinergy Services, Inc., 144 Ohio App.3d 410, 416, 760 N.E.2d 453, 457 (1st Dist.2001). Typically, these provisions provide that “acts of God” (e.g. a hurricane, earthquake, fire, etc.), terrorism, or wars excuse performance under the lease. The clause may also state that certain government acts (like eminent domain) excuse the performance of a party. The provision might not, however, explicitly list a pandemic as a force majeure event. In addition, in some circumstances, the force majeure provision in the lease specifically states that it does not apply to the payment of rent or other monetary obligations under the lease. While courts typically have limited force majeure clauses to the express language in the contract, unclear or broadly worded provisions will give both parties significant room to advocate whether related COVID-19 events fall within the provision.
In connection with the COVID-19 pandemic, the non-performing party may be able to argue that at least two events fall within the force majeure provision: (1) that the pandemic itself fits within this provision; or (2) in states where the government has ordered that non-essential businesses cease operations, that the government mandate constitutes a force majeure event. Determining whether either of these events trigger the force majeure provision will largely rest upon the contractual language. In cases that lead to litigation, the non-performing party has the burden of proving that the event was unforeseeable and that it “was beyond the party's control and without its fault or negligence.” Id.
In interpreting the contractual language in your lease, please contact your Brouse attorney with any questions. In addition to the strict contractual language, there may be other arguments under state common law that implicate whether a party’s non-performance is excused, if the contract does not contain a force majeure provision. Finally, a more practical approach may be available to resolve any existing disputes as to whether rent payments should be excused, especially given that several courts across Northeast Ohio (and presumably across the country) have postponed eviction hearings as result of COVID-19. In addition, several courts have postponed hearing dates. As such, landlords will likely have a difficult time evicting tenants for non-payment of rent until things normalize.
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