A lease agreement’s force majeure provision can do any of the following. It could excuse contractual obligations in their entirety if they can’t be met due to a force majeure event. It could delay or defer said obligations until the conclusion of that specific force majeure event. And, in extreme instances, it can allow for the complete termination of a contract. But a performance failure isn’t typically excused if a force majeure event has only made it more difficult or expensive to do business. There needs to be more. What a force majeure provision means through COVID-19 will be up to the courts. They’ll likely need to review the specific language of each individual agreement’s provision. In this blog post, we’ll look at a few things all parties need to look for or consider.
Events or Circumstances
Most force majeure provisions will list specific events or circumstances where the provision can be applied. This may include but isn’t limited to war, an act of God, natural disasters, an act of terror, civil unrest, government action, and conditions that make it impossible to find laborers or materials.
Confusion and uncertainty abound when it comes to how California courts will treat the force majeure provision. Due to the COVID-19 pandemic and subsequent government stay-at-home orders and supply chain disruptions, many businesses aren’t able to satisfy their contractual obligations right now. And the courts have yet to determine if the impact of COVID-19’s fallout constitutes as a force majeure event.
This is understandably an unprecedented time. This unforeseen set of circumstances has both sides of a lease agreement asking questions about force majeure provisions.
Does a Force Majeure Event Really Excuse Rent Payment or Monetary Obligations
Force majeure provisions are all the talk right now because tenants and commercial landlords are both wondering if it excuses paying rent or other monetary obligations.
Here’s some disheartening news about that. First, most force majeure clauses specifically state that being unable to pay rent or meet a contractually agreed upon financial obligation isn’t a force majeure event.
A force majeure clause also won’t typically excuse a tenant from paying their rent or excuse a landlord from paying for promised tenant improvements or satisfying an agreed-upon tenant improvement allowance.
That said, every lease needs to be reviewed to determine whether or not it contains an inability to pay exclusion. Look for specific verbiage in the force majeure clause. Words or phrases like “impossibility or impracticability of performance,” “ purpose,” and “early termination.” In California and many other states, signing a written agreement is seen as intent to address the specific contingencies within. It’ll be enforced by the courts.
There Are Still Too Many Unknowns
It’ll be interesting to see where the courts go with force majeure clauses in the midst of COVID-19. How will they view the following…
California state government required all non-essential businesses close to slow the spread of COVID-19. Since businesses had to shut down per government order, doesn’t this fall under the category of a “government action” – which is a common inclusion as a force majeure event in most contracts?
Does a global pandemic and easily transmittable virus constitute as an Act of God?
Can force majeure be applied if a landlord isn’t able to complete tenant improvements because of a labor shortage or inability to obtain necessary permits or inspections?
Force Majeure in California
Citing Witkin Summary of Law, courts in California hold the position that force majeure is the equivalent of the common law contract defense of impossibility and/or frustration of purpose.
This states that failing to satisfy contractual obligations can be excused if it’s:
(1) due to an unforeseeable event
(2) due to reasons outside of the parties’ control
(3) an impossible or impractical performance
When it comes to impossibility, the position of California courts has consistently been that any inability to perform “must consist in the nature of the thing to be done and not in the inability of the obligor to do it.”
This means that not only should the pandemic’s impact on your business be highlighted if arguing that the force majeure clause should apply, but so should the pandemic or shutdown’s impact industry-wide. Additionally, while a supply chain disruption or other vendor shutdowns don’t directly disable one’s ability to meet contractual obligations, what’s bringing forth nonperformance issues now is indded caused by the “nature of the thing being done” – rules mandated by the government that have forced businesses to close or be shut themselves off to the general public and in-house workers.
What we do know right now is any landlord or tenant wanting to know if a force majeure clause excuses them from a contractual obligation needs to notify the other party ASAP. Many contracts, particularly construction contracts, contain language stating a party will lose its right to claim force majeure by failing to notify the other party within a specific time frame.
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