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Does Covid-19 qualify as an event of Force Majeure under your lease?
April 03, 2020


All articles in this COVID-19 Response Resource issue are effective as of April 3, 2020.

Generally, the types of events that constitute force majeure depend on the specific language included in the contract clause itself.[1] The force majeure clause is interpreted according to the same principles and enforced to the same extent as any other clause in a contract.[2]  The language contained in a force majeure clause will be relied upon and analyzed in order to determine what constitutes a force majeure event, thus triggering the clause, and to determine its effect on a party’s contractual duties.[3] For example, some contracts may define what types of events can constitute a force majeure event, such as “unforeseeable causes beyond the reasonable control of and without the fault or negligence of the party claiming Force Majeure.”[4]  Other contracts may not provide for any definition and may simply refer to an act of force majeure.[5]  In either case, a court will look to the express language of the contract to determine if an event of force majeure excuses performance of a contract.

Force majeure provisions often expressly exclude payment obligations of the parties. Unless the tenant has negotiated specific rent offset rights arising from events such as a pandemic or epidemic, or government ordered closure of its business, the historically narrow interpretation given force majeure provisions by courts make it unlikely that force majeure provisions will excuse the tenant from its obligation to pay rent or that the lease would otherwise permit any reduction or abatement in rent by the tenant.

Could the Defense of Impossibility Apply to Relieve Landlord and/or Tenant from Obligations under the Lease?

In Utah, under the contractual defense of impossibility, an obligation is deemed discharged if an unforeseen event occurs after formation of the contract and without fault of the obligated party, which event makes performance of the obligation impossible or highly impracticable. The rationale for this rule is founded on principles of assent and basic equity. Parties are ordinarily thought to have made certain assumptions in visualizing their agreement, and those assumptions comprise part of the basis and extent of their assent. The impossibility defense serves to prevent enforcement where those assumptions, and hence, the parties’ assent, prove to be faulty.[6] 

In Idaho, the doctrine of impossibility applies when the contract is no longer capable of being performed due to unforeseen, supervening acts of a third party. To assert impossibility, performance of the contract must actually be impossible and not just more difficult or more expensive. The task itself must be impossible for anyone to perform and not be merely impossible for that particular party to perform.[7] 

Depending on the language in the lease, it is possible that landlord and/or tenant would have an argument for impossibility of performance to relieve it from its obligations under the lease. An example of a situation in which this could apply is if a lease required tenant to operate continuously. Tenant may have an argument for impossibility of performance due to the current government requirements. Another example is if a tenant is required to have access to its premises on a 24-hour-a day, seven days-per-week basis. If landlord closes the premises or restricts access due to government requirements or recommendations, tenant may have an argument that it is impossible for it to perform under the Lease. 

The remedy for impossibility of performance will depend on the circumstances at issue, the language contained in the lease and the relief requested. It could be termination of the lease entirely or excusal for a default during a specific time period. 

Could Frustration of Purpose be used to Relieve Landlord and/or Tenant from Obligations under the Lease?

Frustration of purpose differs from the defense of impossibility only in that performance of the promise, rather than being impossible or impracticable, is instead pointless.[8] In order for frustration of purpose to apply, first, the purpose that is frustrated must have been a principal purpose of that party in making the contract. Second, the frustration must be substantial. It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss. Third, the nonoccurrence of the frustrating event must have been a basic assumption on which the contract was made.[9]

As with impossibility, whether or how this would apply will largely depend on the specific language in the lease. For example, under a lease in which rent is tied to profits or is a percentage of revenue, it may be possible to reduce or abate rent if tenant has been required to close or significantly reduce its business and therefore, is no longer making any profits or revenue. In that case, the purpose of paying rent could be considered frustrated.

Do the Current Government Orders Constitute a Taking under your Lease?

Tenants may reach for novel angles, like eminent domain, arguing they are entitled to rent relief. Some tenants may contend that government action requiring businesses to close temporarily to prevent the rapid spread of COVID-19 effectively converts leased spaces for “public use,” requiring government compensation.

Some tenants negotiate with their landlord for the right to file their own eminent domain action to recover if the government has “taken” the property where they operate their business. Tenants directly impacted by government closures likely have the most direct claims to make against the government for just compensation, as opposed to landlords for whom the business impact is indirect/secondary, i.e., the landlords are impacted because the tenants are impacted. Additionally, some leases give the entire award to the tenant for a temporary taking.

Tenants may also have options to terminate their leases or, at a minimum, demand short-term rent abatements, if the government closes their establishments or drastically curtails their hours or conditions of operation. Most eminent domain provisions provide the landlord or tenant with the right to terminate the lease in the event of a permanent taking. The same provisions may also specify that the tenant is entitled to a rent abatement in the event the government taking is for a shorter duration, such as 60-90 days. If government closures related to COVID-19 are deemed takings and last only for a short duration, tenants may pursue rent abatements under the language of their particular leases. This theory is untested and would shift the burden to commercial landlords to process their own taking claims against the government.

What are some Alternatives?

While some tenants have announced closures and plans to withhold rent, other landlords and tenants are seeking more creative approaches that would provide short term relief. These include:

  • Rent Holiday- Deferred payment of rent for a short period (e.g. one to three months). Tenant could repay the deferred amount by spreading out smaller payments during the remainder of the lease term. Alternatively, the lease term could be extended for the same length as the rent holiday and tenant could repay the deferred amount at the end of the extended lease term.
  • Rent Reduction- Payment of reduced rent for a short period. The reduced rental amount could also be repaid by the tenant in the same manner as described for a rent holiday.
  • CAM Only Payments- Payment of only tenant’s share of common expenses, taxes and insurance for a short period with no payment of base rent.
  • Security Deposit Application- Application of tenant’s security deposit toward upcoming rent payments without a requirement to replenish the security deposit until the crisis abates.
  • Guaranties- Deferred payment of rent in exchange for a guaranty of payment in the future.

For more information about this or other related issues, contact Lauren Reber at (801) 536-6731 or send an email to lreber@parsonsbehle.com.

 

[1] 30 Williston on Contracts, Force Majeure Clauses, § 77:31 (4th ed.) (citing Maralex Resources, Inc. v. Gilbreath, 2003 -NMSC- 023, 134 N.M. 308, 76 P.3d 626 (2003))

[2] See Burns Concrete, Inc. v. Teton Cty., 161 Idaho 117, 120, 384 P.3d 364, 367 (2016).

[3] Maralex, 76 P. 3d 626, 636.

[4] See Afton Energy, Inc. v. Idaho Power Co., 122 Idaho 333, 338, 834 P.2d 850, 855 (1992).

[5] Burns Concrete, Inc., 161 Idaho at 120.

[6] See Western Properties v. Southern Utah Aviation, Inc., 776 P.2d 656 (1989).

[7] State v. Two Jinn, Inc., 151 Idaho 725, 728–29, 264 P.3d 66, 69–70 (2011) (internal citations and quotation marks omitted)

[8] See Western Properties v. Southern Utah Aviation, Inc., 776 P.2d 656 (1989).

[9] See Bitzes v. Sunset Oaks, Inc., 649 P.2d 66 (1982).