By the time this article is published, distribution of the Covid-19 vaccine should be well underway. While this is a hopeful development to say the least, businesses are not out of the woods yet. The vaccine delivery is fraught with logistical burdens, and the recovery of the business sector may well proceed unevenly across industries. If commercial tenants have not done so already, now is the time to check their leases for a force majeure clause. A force majeure clause excuses nonperformance when events beyond the control of the parties prevent performance. Whether a force majeure clause is triggered is a question of contract interpretation based on the specific language in a contract.
The first step is to review the force majeure events listed in the contract. If the commercial lease uses broad categories to describe the circumstances potentially excusing performance, a tenant may be entitled to relief. Although the issue is not yet developed in Minnesota appellate courts, an Illinois bankruptcy court recently found that state’s stay-at-home order triggered the force majeure clause in a tenant’s commercial lease. In that case (titled In Re Hitz Restaurant Group), the landlord sought a court order to enforce the tenant’s past-due rent obligations on the tenant’s restaurant. The tenant argued its obligation to pay rent was excused by the lease’s force majeure clause, which provided: “Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by … laws, governmental action or inaction, orders of government ….” The court agreed with the tenant, finding that the state’s stay-at-home order unambiguously triggered the force majeure clause in the lease, as it constituted both “governmental action” and an “order of the government.” Consequently, the tenant’s obligation to pay rent was reduced in proportion to its ability to generate revenue under the stay-at-home order.
In contrast, if the event that causes a tenant’s nonperformance is not specifically identified in the force majeure clause, the tenant’s claim for relief will be an uphill battle. Narrowly constructed force majeure clauses generally excuse nonperformance in the limited event of an “act of God,” which legal authorities generally define as “an overwhelming, unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado.” Although a tenant could argue that Covid-19 falls under this definition, it may be required to show that Covid-19 itself, and not the human reaction to Covid-19, prevented it from performing the lease. Thus, tenants that were forced to temporarily close or limit the capacity of their businesses have the more difficult task of arguing that Covid-19 itself impeded their contract performance, not the government orders or voluntary business actions taken in response to Covid-19.
Even if a tenant’s commercial lease does not have a force majeure clause, or if the force majeure clause is narrowly construed, a tenant still has the option of working with its landlord to restructure the lease. There are several potential lease modifications that may help a tenant through a period of economic hardship, including rent abatement and rent deferral.
Under a rent abatement modification, a landlord agrees to relieve the tenant of the obligation to pay rent for a specified period of time. This can be accomplished by a written agreement separate from the lease. If a landlord is not open to full rent abatement, the landlord may be willing to reduce rent so that the tenant pays just enough to cover the landlord’s debt service, taxes, and operating expenses. For a landlord, forgoing profit in the short term may be a more attractive option than trying to market vacant space.
Under a rent deferral modification, a landlord agrees to defer rent until a definite or contingent resumption date. If a landlord is willing to defer rent, the parties will have to negotiate whether the deferred rental amount will be partial or full, the amortization schedule for the deferred rent to be paid back, and the amount of interest that will accrue on the deferred amount. Similar to rent abatement, rent deferral should be made by written agreement and may be a better option for the landlord than searching for a new tenant.
Landlords and tenants may also consider non-monetary modifications in addition or in place of monetary modifications, such as a lease extension, the elimination of tenant option rights, and additional guarantees. The key for a tenant proposing modifications is to be proactive and prepared to make reasonable and creative concessions.
Beyond its immediate impact, the Covid-19 pandemic is likely to have a lasting effect on how tenants and landlords negotiate their commercial lease agreements. The pandemic has illustrated the legal significance of some often dismissed “boilerplate” contract provisions, such as the force majeure clause. Tenants and landlords will be best served by carefully reviewing and negotiating all their lease’s provisions. And yet, since leases are unlikely to address every conceivable scenario, when unforeseen events occur, creative exploration of lease amendments may ultimately help both parties save time and money.
Joseph Heck and Eric Johnson are attorneys at Fryberger Law Firm. They can be reached at Fryberger’s Duluth office at (218) 722-0861.
The material in this article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.