During this COVID-19 crisis, force majeure clauses in commercial real estate contracts are a hot topic in real estate. A force majeure clause excuses a party from performing a contractual obligation due to an unforeseen event beyond a party’s control. While force majeure events have generally included wars, weather disasters, terrorism, and government action, Florida courts, in the time ahead, will eventually rule on whether the consequences of the Coronavirus as a global pandemic constitute a force majeure.
Although it may seem common sense that a global pandemic is an unforeseen event which would affect a contract, Florida courts will have to address the question as to whether and how force majeure clauses apply to this pandemic especially since real estate contracts, while usually including a force majeure provision, have not until now included specifically a “pandemic” as an excuse for nonperformance.
Co-tenancy Clauses: A Way out for Specific Commercial Tenants
While commercial landlords and tenants are examining their contracts as more and more tenants are having difficulty paying their rent, the actual wording of the force majeure clause is key as well as the fact and circumstances to determining if whether using the clause will be successfully used to avoid paying rent.
Most commercial leases are drafted in favor of the landlord, making the argument to not pay rent moot, especially if the language of the force majeure clause explicitly states that force majeure does not apply to rent payments. Many times the force majeure language is worded such that it relates to delivery of goods and services rather than an obligation to pay rent. This means that while you currently may not have to pay rent due to the economic disruptions caused by COVID-19, it does not mean that you are not responsible for the rent altogether.
However, some commercial leases, particularly in malls and shopping centers, typically have co-tenancy clauses. Co-tenancy clauses generally provide that if less than, for example, 80 percent for space is occupied at the property at any given time or if a major tenant such as a department store or grocery store leaves, then the tenant is allowed a break in rent. The commercial tenant may also be given the ability to terminate a lease early. Co-tenancy clauses are meant to protect tenants when circumstances happen that are outside of their control.
Impossibility of Performance
In the absence of a force majeure clause or as an alternative, a party to a contract may be excused from performance of the contractual obligations by claiming impossibility of performance due by the virus itself and/or governmental orders closing the economy for safety purposes. This means that a commercial tenant may claim that the rent obligations is impossible to perform because the COVID-19 crisis was not foreseeable at the time of the contract. Had the pandemic been foreseeable then the event would have been provided in the contract. This is a potential argument that will inevitably be made to challenge lease provisions.
Commercial Leases: What will happen if Rent is not paid?
Currently, with courts not operational and fully open, and while there is a moratorium not allowing for residential evictions in place, commercial leases with no co-tenancy clause will require clarification and interpretation as to their force majeure clauses and therefore remain unresolved.
These unprecedented times as well as the contract language itself will be reviewed in light of one’s force majeure clause. Most likely the courts will look to past events including hurricanes, the September 11, 2001 tragedy, and the 2009 swine flu for guidance as to whether force majeure arguments prevailed and need for judicial intervention. Some commentators have suggested that it may be easier to win force majeure protection in Florida than other states since Florida courts are well acquainted with the concept of force majeure in the context of hurricanes.
Until such time as we have a determination as to whether force majeure covers this pandemic, we are all “stuck” in place. During this time period, both commercial landlords and tenants should attempt to work out a resolution including eventual payment arrangements.
Commercial rent obligations may be negotiated during this time; however, depending upon the language of the contract, especially force majeure provisions, and the circumstances of the parties the rent obligation will not necessarily be forgiven. Commercial landlords may allow for deferral of payment—but must eventually obtain payment for the costs that they are carrying.
One thing is for sure: until such time as the economy is revitalized and courts are fully operational, commercial tenants will attempt to seek protection under force majeure (or where applicable co-tenancy clauses). If Florida courts eventually agree that this pandemic was an unforeseeable event and the force majeure language includes specific language to that effect, there will be a deluge of contracts being undone, potentially allowing for the nonpayment of the rest of the commercial lease term.
Our team can review and provide an evaluation on your commercial lease if you have questions about how Covid may have affected your terms. 561.838.9595 or [email protected] to schedule a consult.