The Force Majeure Clause: Are you protected?
by: Gardi, Haught, Fischer & Bhosale
On March 15, 2020, an event occurred which very few people thought possible. The United States of America closed. Almost every business closed its doors, affecting a nationwide economic shut down. Millions of commercial business owners wondered how they were going to maintain operations and pay their bills, as their expenses continued to accrue during the shutdown despite their inability to generate income. One of those expenses, the payment of rent, became an immediate problem, as most states did not impose an eviction moratorium on behalf of commercial tenants.
Is your business ready for the next pandemic? Many businesses cannot function without a place of operations. But what happens to your use and occupancy of a property when you cannot make the lease payments due to a federally mandated shutdown? How can a commercial tenant protect itself from eviction when it cannot generate income to pay its rent?
Many would look for protection in the force majeure clause of their lease. Black’s Law Dictionary (11th ed. 2019) defines force majeure as “an event or effect that can be neither anticipated nor controlled; especially an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do.” The purpose of the force majeure clause is to protect the parties from liability due to a breach of a contract, which is caused by forces outside of the reasonable control of the parties, such as “Acts of God”, shortages of labor or materials, strikes, or the enactment of new governmental laws, regulations, or restrictions after the commencement of a contract.
For the non-payment of rent, the frequent problem with the use of this provision as a protection from liability is the issue of causation. Can it be proven that the event being alleged as unanticipated or uncontrolled is the reason for the breach? For example, in the current instance, will a court view the tenant’s failure to pay rent as the result of an unavoidable loss of income due to an unanticipated and mandatory shutdown, or as the result of the tenant’s choice not to pay the rent through any means available to the detriment of the landlord?
Traditionally, a loss of business due to an epidemic or pandemic has not been a justification for protection under a force majeure clause, but prior to now, such an event has not resulted in a global shutdown the magnitude of which we have just endured. The ultimate question before a court will be: Did the specific terms of the lease contemplate COVID-19, or such similar epidemic, to be a force majeure event, and if so, did the event cause the tenant’s failure to perform? As always, when dealing with any type of contract dispute, the language of the agreement will control. The world response to COVID-19 created a new paradigm for which commercial tenants must prepare. Specifically including such events in the force majeure clause may well protect your business from substantial financial loss, eviction or other unforeseen consequence.
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