In many lease negotiations prior to 2020, force majeure provisions were an afterthought—relegated to the miscellaneous section at the very end of the lease; the language a mere formality that required little discussion. However, since the onslaught of COVID and the devastation it has brought to so many brick and mortar operations, these provisions have been brought front and center. An analysis of “standard” pre-COVID force majeure clauses shows that the language often did not address the prolonged circumstances that tenants are suddenly (and unexpectedly) experiencing. As parties have tentatively resumed negotiations for new leases, focus has turned to crafting force majeure clauses in a manner that reflects the reality of COVID as the new normal (at least for the time being).
Here are a few things to consider:
Defining the Force Majeure Event. Most parties will agree to include epidemics and pandemics as events of force majeure, although landlords often want to be more specific about what those terms mean in order to ensure that it truly is a “superior force” and not simply a seasonal flu or a tenant-caused problem such as a salmonella outbreak affecting only the tenant’s restaurant. This landlord concern might be addressed by adding that an applicable authority (such as the World Health Organization or Centers for Disease Control) must declare an event to be an epidemic or pandemic. From a tenant’s perspective, the impact on their business may not come directly from an epidemic or pandemic itself, but rather from the related consequences such as impositions of quarantines or limitations on the number of customers that can be in a specific space, so tenants may consider adding these circumstances as force majeure events in their own right.
Impact of the Force Majeure Event on the Parties’ Obligations. One of the hallmarks of the “standard” force majeure provision is that while it will excuse many of a party’s duties or obligations, such as the requirement to complete work within a certain period of time or maintain certain hours of operation, it will very rarely allow a tenant to stop paying rent. In the pre-COVID world, this was an accepted stipulation, as most force majeure events (such as a strike or severe weather) were unlikely to go on for a significant period of time and the parties could typically insure over such risks through business interruption or other forms of insurance. As we enter the 10th month of COVID restrictions, many businesses are looking for the force majeure provisions in their new leases to provide them with some rent relief if something like this happens again, especially given the almost universal rejection by courts of tenant claims for business interruption insurance coverage. Some landlords have been receptive to this idea but will only provide relief if the tenant is completely prohibited from operating by a government order. But what if a business is allowed to operate in some capacity (such as a restaurant that can remain open for take-out and delivery or a retail store that can have 25% capacity)? Those tenants might ask for some rent restructuring based on a percentage of sales or some other correlation to the amount of impact the restrictions have on them. There are also considerations as to how long any such relief might last—tenants will of course want rent relief to continue so long as their businesses are impacted, but landlords also have bills to pay and lenders to keep happy and they are unlikely to agree to keep this open-ended.
Alternative Assistance. Many landlords will want to ensure that tenants take the benefit of any rent relief only as a last resort. As such, many may require tenants to at least use reasonable efforts to receive government assistance and/or insurance coverage as a condition to receiving any rent relief from the landlord.
Notice. When landlords agree to give a tenant rent relief, they often require that the tenant give notice prior to taking the benefit of such relief. This is helpful to ensure that any delays in performing are actually caused by the force majeure event and not some other issue down the line that would not be considered force majeure. Of course, when a tenant’s entire business is suddenly under new restrictions that the tenant is trying to mitigate, sending a notice to their landlord might be at the bottom of their to-do list, not to mention cumbersome during a pandemic when office workers are under stay at home orders. One way to help bridge this gap could be to allow notices to be sent by email. Another way is to waive the need for notice if the event is of such magnitude that it is known to the general public.
Extension of Term. When a tenant receives rental assistance (particularly in the form of a rent abatement), some landlords will require that the term of the lease be extended for the same period of time.
With promising vaccines in the works, COVID may soon be a thing of the past. However, its impacts may very well change the approach to, and the emphasis on, force majeure provisions in a way that lasts beyond this worldwide pandemic.