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Now that California and many other states have entered the first full week of Stay-At-Home orders, many businesses are confronting the reality that they have significant lease commitments without the ability to meaningfully access their premises and diminished income streams to pay for them. Who bears the risk for the loss is something that landlords and tenants will need to confront and may be the subject of lease negotiations and potential litigation.
Businesses need to consult the language of the lease agreement, and look for clauses that may provide relief in case of unforeseen circumstances. This is usually called a force majeure clause, which gives a party a defense to performance where it may be impossible because of events outside the parties’ control.
These clauses are similar, but the specific language can matter greatly. If your lease has a force majeure clause, and it probably does, businesses should look for references to governmental restrictions or epidemics for their best chance of applicability.
Businesses must make a careful reading, though. Even having a force majeure clause in your lease may not relieve rent obligations because some clauses specifically exclude rent payments from the relief. Sample clauses may look like:
The parties hereto are relieved of any liability if unable to meet the terms and conditions of this Agreement due to any “Act of God”, riots, epidemics, strikes, or any act or order which is beyond the control of the party not in compliance; provided that it takes all reasonable steps practical and necessary to effect prompt resumption of its responsibilities hereunder.
or
Whenever a period of time is herein prescribed for action to be taken by Landlord or Tenant (except for the obligation of Tenant to pay the Monthly Rental Payments, Additional Rent or other sums due hereunder), then neither party shall be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the control of such party.
Even if your force majeure clause does not provide rent relief, businesses should also look to other doctrines such as frustration of purpose, impracticability, and habitability as a means to address who ultimately bears the risk of loss. The availability of these contract defenses is likely subject to the law of your businesses’ specific state, the local Stay-At-Home order, and the particular circumstances of your business disruption. Other possible assistance could come from your local government, some of which have provided eviction relief as we detailed in a prior article (Is Your Commercial Property Subject to COVID-19 Related Evictions). Businesses should also look to their insurance to see if business interruption coverage is available (Are You Covered for a Government-Ordered Shutdown?).
Please contact your Payne & Fears attorney if you would like to know more or need analysis of a specific lease.
