The COVID-19 pandemic has forced us all to re-evaluate the ways we conduct business, including remote work opportunities, surface sanitization, social distancing, human resources policies and indoor air quality. For those in the commercial leasing business, the concept of force majeure and how it applies to the pandemic is also being evaluated. Current litigation related to the pandemic could have major implications on the way commercial force majeure lease clauses are interpreted for both owners and tenants.
What is Force Majeure?
Force majeure is a clause frequently found in commercial leasing contracts. Loosely defined, force majeure is an unanticipated occurrence that cannot be controlled. These types of events may include acts of God, governmental restrictions, material shortages, labor strikes, or even war or insurrection. In a contract, a force majeure clause typically offers one of the parties a temporary reprieve from its contractual obligations if one of these events severely impacts their business.
Here in Florida, where our offices are based, our minds naturally turn towards hurricanes when we hear the phrase “act of God,” but many other circumstances can create challenging times for tenants and property owners. Certainly, the COVID-19 pandemic has created unique challenges for many tenants. The pandemic made it difficult for businesses to operate normally, and in many cases, government restrictions required nonessential businesses to shut down entirely for prolonged periods. Many businesses have turned to the force majeure clause seeking relief from rent or other obligations during these unprecedented times.
Does COVID-19 Qualify as Force Majeure?
If force majeure can be defined as an unanticipated and uncontrollable event, then COVID-19 meets the broad classification of force majeure. However, the true definition of force majeure differs from contract to contract, and the specific terms of a lease agreement will dictate not only qualifying events but also the contractual obligations that may be excused. In other words, each leasing contract’s force majeure clause is unique in what it covers.
Cases involving force majeure are currently working their way through the legal system, not only in Florida and across the U.S., but around the world. Florida courts typically adhere to very strict interpretations of contracts. While many commercial real estate professionals might consider a pandemic to be an act of God, courts will likely want to see epidemics or pandemics specifically listed in the contract as a force majeure event to trigger the clause.
Some tenants may turn to force majeure in hopes of deferring or even ceasing rent payments. However, commercial lease contracts rarely excuse payments or offer abatement as part of a force majeure clause. On the other hand, landlords may look to the clause to excuse themselves from paying for tenant improvements. Again, the actual terms of the lease will dictate the obligations that may be excused under force majeure.
Implications for Commercial Leasing
In many ways, force majeure clauses have been something of an afterthought in contracts until now. While it may be difficult to enumerate “unanticipated” events in advance, the pandemic has taught us that force majeure events should not be treated as boilerplate material. Instead, they should be thoughtfully considered when writing commercial lease agreements. Both property owners and tenants should actively place more scrutiny on this clause and negotiate force majeure events and the scope of relief offered. Ideally, a force majeure clause will allow both parties relief of an acceptable level of risk during an unanticipated and uncontrollable event.
Content and strategies shared on NAIOP blog posts are intended to provide information and insights to industry practitioners and do not constitute advice or recommendations. NAIOP and its blog post authors disclaim any liability for actions taken as a result of these blog posts.
Gary Tasman is the Founder of Cushman & Wakefield Commercial Property Southwest Florida and serves as its CEO/Principal Broker. The firm provides commercial real estate solutions, locally and globally, in every stage of the real estate process, representing clients in buying, selling, leasing, financing and valuing assets.