As the COVID-19 coronavirus continues to disrupt the global economy, parties to commercial real estate contracts are taking proactive or reactive measures that may result in the non-performance of contractual obligations. Whether seeking to withhold or limit rent payments, terminate contracts, or otherwise delay or fail to perform contractual obligations, these parties may need to determine whether their contracts permit them to declare that a force majeure event has occurred in order to excuse performance. In addition, they will need to stay up-to-date with the constantly evolving federal, state, and local governmental orders being implemented to slow the spread of the virus and mitigate its economic toll. Both COVID-19 and the corresponding governmental responses are arguably unforeseeable events that may fall within the scope of force majeure clauses contained in commercial leases, purchase and sale agreements, commercial loan agreements, and other real estate related agreements.
Force majeure is a French term meaning "Superior Force" and refers to an unforeseeable event beyond the control of a party and that prevents the party from meeting its contractual obligations. Force majeure clauses are employed to limit damages or prevent specific performance resulting from non-performance or delay in performance when such an event has occurred.
Force majeure is not usually implied into contracts. Rather, the parties must have expressly provided for force majeure as an excuse for non-performance in the contract. Most U.S. states construe force majeure clauses narrowly and the specific language of the contract is of primary importance. A party seeking to invoke force majeure for a particular event must establish (i) that the event falls within the contractual definition of a force majeure event, (ii) that the event was both unforeseeable and beyond its control, and (iii) that there is a causal link between the event and the party's nonperformance. In determining foreseeability, a court will evaluate whether a reasonable person would have been able to foresee the occurrence of the event at the time the contract was entered into. The party seeking to rely on a force majeure clause also bears the burden of proving that the event was beyond its reasonable control and without its fault or negligence, and that it exercised due diligence to overcome the effects of the force majeure event.
Whether a force majeure clause may be successfully invoked to excuse performance in a particular situation is a question that requires analysis of both the explicit contractual language and the law of the particular state under which the contract is governed. Indeed, the interpretation and applicability of force majeure clauses will vary from state to state. Some key questions to consider when analyzing force majeure provisions in the context of COVID-19 are:
- What Events are Specifically Covered by the Clause?
When the parties themselves have defined what constitutes force majeure in a contract, those contours dictate the application, effect, and scope of the force majeure analysis. Courts begin their analysis with whether the specific event that is claimed to have prevented performance is defined within the contractual language agreed upon by the parties. Typical force majeure clauses enumerate events such as "strikes, lockouts, labor troubles, inability to procure materials, failure of power, riots, insurrection, war or Acts of God" as force majeure events. Notably, force majeure clauses do not typically include specific references to "pandemic," "epidemic" or "disease." While it could be argued that a pandemic is an Act of God, many jurisdictions construe Acts of God as being limited to the realm of severe weather and natural disasters.
Many force majeure clauses also include events like "governmental restrictions, orders or moratoria" as criteria qualifying for force majeure treatment. As such language suggests that the governmental action must make performance impossible or illegal, it is questionable whether a governmental "recommendation" (as many of the state-imposed COVID-19 restrictions to date have been styled) would qualify as a force majeure event.
Typical force majeure language may also contain "catch-all" language such as any "other reason of a like nature not the fault of" or "other events beyond the reasonable control of" the party seeking to be excused from performance. Whether an event that is not specified in the force majeure provision falls into such catch-all language involves a fact-specific analysis with results that may vary from state to state. Indeed, courts in a number of states take a very narrow view of how far from the specifically enumerated force majeure events the catch-all language will be permitted expand to, and courts in other states will not give force majeure effect to events that are not of the "same general kind or class" as those specifically mentioned.
Ultimately, the analysis of force majeure clauses in the COVID-19 context is a contract and state specific analysis necessitating case-by-case treatment.
- Can Force Majeure Justify Nonpayment of Rent?
At the outset of the COVID-19 pandemic, many commercial landlords and tenants are concerned about whether payment of commercial lease rents and other amounts owed may be excused. A typical commercial lease will provide that all rent and other amounts owed to the landlord are to be paid without offset, deduction or abatement for any reason other than as may be expressly set forth in the lease. Although force majeure provisions are common in such leases, most commercial leases will (i) specify that the obligation to pay rent or make other monetary payments will not be excused due to a force majeure event and (ii) provide that a party's lack of the financial wherewithal to perform an obligation will never constitute an event of force majeure. Whether a tenant is responsible for the payment of rent during a force majeure event is therefore primarily dependent on the specific contractual language.
- Are there Specific Notice Requirements?
Force majeure clauses may contain explicit notice provisions requiring a party wishing to claim force majeure to notify the other party of the force majeure event within a defined period of time. In addition, such a party may need to describe the force majeure event with a reasonable amount of detail in a notice letter delivered to the other party. Parties claiming that a force majeure event has occurred must be aware of the notice requirements outlined in the force majeure clause and adhere strictly to such requirements in order to invoke the protections outlined therein.
- What if there is no Force Majeure Provision in the Contract.
There is no "common law" concept of force majeure and very few states have statutory equivalents of contractual force majeure clauses. However, if a contract does not contain a force majeure provision, it is possible that performance may still be excused through the doctrines of "frustration of purpose" or "impossibility". Frustration of purpose occurs when an unforeseen event undermines a party's principal purpose for entering into a contract such that the performance of the contract is radically different from performance of the contract that was originally contemplated by both parties. Under the frustration of purpose doctrine, if the principal purpose of the contract has been frustrated, a party may be excused from performance under the contract. This doctrine is narrowly construed and case law is not well developed on the issue. Most cases involve situations where the frustration is permanent and termination of the contract is the remedy sought. A party claiming frustration of purpose for a contract affected by COVID-19 would likely be making a claim of temporary frustration of purpose, which would invariably result in a more difficult case to sustain.
The doctrine of impossibility is a related doctrine that provides an excuse for the nonperformance of contractual obligations based on a change in circumstances, the non-occurrence of which was an underlying assumption of the contract -- thus making performance of the contract literally impossible.
The doctrines of frustration of purpose and impossibility provide alternative ways of potentially avoiding certain contractual obligations similar to the way that a standard force majeure clause might. However, these concepts are limited protective doctrines that courts are generally reluctant to invoke and the results may vary from state to state.
- Does Insurance Coverage Exist for COVID-19 Related Losses?
Parties to commercial real estate leases are inquiring about whether COVID-19 related income losses are covered by their business interruption insurance policies. Generally, there is no coverage for general income losses under such policies. The typical business interruption insurance policy requires that the suspension of business operations must be caused by direct physical loss or damage to property, a standard that COVID-19 caused closures will likely fail to meet. The typical business interruption policy also requires that the suspension of business be caused by or result from a covered loss, with many such policies containing endorsements that specifically exclude coverage for "viruses, bacterium and pandemics." Rarely, policies may contain "civil authority" clauses providing protection in the event that a civil authority makes it impossible or illegal to access property. In the event that a company has "civil authority" coverage, shutting down operations prior to an official civil order requiring the same may void or limit coverage. There are, of course, potential exceptions that may allow a company to avail itself of business interruption insurance coverage. A policy specific analysis is needed in order to determine if a company has available insurance coverage related to COVID-19 losses.
In short, reviewing force majeure clauses in commercial real estate contracts requires a highly fact-specific analysis based on both the contractual language agreed to by the parties and the governing law of the contract. As a result, it will be important to consult with experienced real estate counsel when seeking to invoke force majeure protection, or when presented by a counterparty's claim of force majeure protection, due to the effects of COVID-19.
The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.