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Landlords and a Claim of Force Majeure in the Age of Coronavirus

April 13, 2020 - By: Geoffrey E. Norman
Almost all commercial landlord leases will contain a force majeure (“Delays”) provision. While the terms “Act of God” and “force majeure” are sometimes used interchangeably, the term force majeure is usually defined more broadly than simply an Act of God.

The litigation regarding force majeure provisions in a lease is limited nationally, and even more sparse in Massachusetts. Most of the cases are in fact commercial contract cases which do not involve a lease, but rather a commercial contract of some kind.

1. Acts of God are usually related to severe and extreme weather conditions. It is quite possible that the coronavirus would not be considered an Act of God, and there would be no great impetus to do so since force majeure clauses used generally in landlord leases are broader than simply an Act of God. Also included as part of force majeure in most landlord leases are “war, civil commotion, fire or other casualty, labor difficulties, shortages of labor, materials or equipment, governmental regulation, or other causes beyond such party’s reasonable control”, or words to such effect. Governmental regulation may well apply, depending on the current and future actions of the Governor of Massachusetts, and the catchall phrase “or other causes beyond the other party’s reasonable control” would almost certainly include our present coronavirus pandemic. The fact that “virus”, “epidemic” or similar such words are not used in the definition would not be determinative since the list is not sui generis, and so the catchall would more likely be determinative.

2. The broad nature of the force majeure definition does not mean that the courts will see every disastrous occurrence as a force majeure event, since the three essential elements of foreseeability, non-anticipation and lack of control need to be present. (See the recent Massachusetts Appeals Court case of Harper v. North Lancaster, LLC (95 Mass App. Ct. 1119 (2019)).

3. There is also some thought (although no Massachusetts case supports it) that the concept of force majeure will generally be enforced in a just and equitable manner, if the result of the force majeure determines that the cost of risk falls far more on one party and unfairly so. (See the New Jersey case of Facto v. Pantagis (Superior Court, Appellate Division, of New Jersey, 390 N.J. Super 227 (2007)). In Facto, the appellate court reversed the trial court decision stating that “where one party to a contract is excused from performance, the other party is also generally excused from performance”. This raises the question of whether a provision requiring a tenant to pay rent in all circumstances (and bear all the risk) can be enforced in the absence of quiet enjoyment. It appears that this question has not been previously addressed in Massachusetts, but the coronavirus may cause the courts to do so.
4. Any properly drawn commercial lease will generally exclude the payment of rent from force majeure (i.e. the tenant must continue to pay rent even if force majeure applies). Hence the initial approach by a tenant regarding force majeure might (and often did) focus on the ability to stop operating in the premises. This may be acceptable to the landlord in certain circumstances, and under certain conditions (e.g. tenant vacates, but there is no abandonment of the premises). However, the payment of rent is another matter entirely and a plain reading of the rent exclusion provision is likely to be helpful to the landlord.

5. Two additional concepts “impossibility” and “frustration” are tied to the concept of force majeure. Impossibility is a more limited defense and usually involves an Act of God that makes the performance of the contract objectively impossible. The Act of God must be unforeseen and hence could not have been provided for in the contract. Impossibility only applies if the contract is impossible to perform. It cannot be simply financially difficult to perform, even to the extent of bankruptcy.

The doctrine of “frustration” may also be available but is not generally invoked. It would apply only if a party’s principal purpose is completely, or nearly completely, frustrated and the event cannot have been foreseen or anticipated at the time of the contract

These concepts have been mentioned but used rarely (if at all) in Massachusetts. They could well be seen to operate independently of a force majeure provision. In the matter of Baetjer v. New England Alcohol Co. (Massachusetts Supreme Judicial Court, 319 Mass. 592 (1946)), the court considered the issue of impossibility but decided that it was a foreseen consequence (i.e. the contract was signed after the U.S. had entered World War II and certain other provisions of the contract recognized this). The court also considered the doctrine of “frustration” but rejected its applicability in this instance since the buyer knew of the risks involved in the contract and that the buyer cannot rely on “known risks assumed by him (that) have turned out to his disadvantage.”

6. Hence a force majeure provision in a lease could cover the coronavirus pandemic if it: (i) includes specific public health language (very few provisions do), (ii) includes governmental regulation, or acts of the government and the like (most leases would have this language), (iii) includes a so-called “catch all phrase” such as “or other similar or dissimilar events or circumstances beyond the party’s reasonably control” (most leases would have this language as well), and (iv) if the force majeure event is itself unforeseen, unanticipated and uncontrollable. Even if the force majeure does apply it is likely to exclude the payment of rent from your tenant’s force majeure rights.
However, a word of warning, in Massachusetts the courts may well consider whether the landlord’s lease contains (in addition to a force majeure provision) an “independent covenants” provision (i.e. the payment of rent is a separate covenant and independent of landlord’s covenants). Most recent and well-drawn commercial leases in Massachusetts will have this language and if your lease does not have this provision, it could present problem for you as the landlord.

7. Two other parties need mention in regard to force majeure. Landlords will most certainly have an insurance policy (very often as part of your fire and casualty policy) that covers loss of rent or business interruption. The tenants will have their own such policies. These insurance policies will also have force majeure provisions that may or may not be similar to the provision in the lease.

More recent insurance policies (as a result of the SARS epidemic) contain a provision on viruses and/or epidemics, generally excluding them from the concept of force majeure. This presents a major concern for the landlord (as well as the tenant) since their respective insurers are likely to want to avoid any insurance coverage for losses related to the coronavirus, leaving all risk sharing to landlord and its tenants. Landlord’s Mortgagee (or Mortgagees) are also unlikely to want to be major contributors to their borrowers here and mortgage loans rarely have force majeure provisions which will favor the borrower.

It has been interesting to note, however, that lenders have been responsive thus far to their borrowers and have quickly provided landlords with offers of mortgage payment deferrals usually for 2 or 3 months and often without additional interest on the delayed amount. If you, as landlord, have not already spoken to your lenders about such deferrals, you should do so as soon as possible.

8. How all this plays out (particularly if the present “shut down” continues for several more months), is at this stage difficult to ascertain. At present a bill has been filed in the Massachusetts state legislature (State Senator James Eldridge SB2888) that would require insurance companies to cover business and rental losses (of tenants) for the period of the State of Emergency (even if the coronavirus is excluded by the policy). Also, most landlords are taking a proactive approach with their tenants, which usually provides some relief by postponing rent payments (for 2 or 3 months) to the landlord.

In such manner the landlords are “passing through” the relief they are receiving from their lenders to their tenants. All of this may work well if we are all back at work by June 1 and if our economy comes back strongly. If not, then tenants will not be able to pay the deferred amounts when due, and certain tenants will never be able to reopen for business. Hence, the present circumstances call for a cooperative approach which favors a dialogue between landlords and their tenants.

With this in mind, the following is suggested: (i) if a particular tenant has not paid the April rent and has approached the landlord seeking relief, be proactive and provide the tenant with a proposal to delay/defer the payment of April (and probably May) rent (this rent could be repaid over 6 months starting September 1, or October 1, 2020; (ii) based on the tenant’s response, the landlord may need to discuss alternatives with the tenant as to how the tenant can repay the landlord and stay in business; and (iii) make sure that the tenant applies for all financial assistance offered to them under the recently enacted CARES legislation.

A second word of warning, most of this money is in the form of a grant, but only if it is used principally for employee salaries and wages. Landlords (depending on their circumstances) should also contact their banks and make an application for CARES funds themselves. This should be done without delay since the first small business applications under the CARES Act were well over-subscribed. On-going conversations with mortgagees and insurance carriers are also important, and as always sound legal counsel will be enormously helpful in proceeding with tenants, lenders and insurers in such circumstances.

This website presents general information and is not intended to provide legal advice and it should not be considered or relied upon as such. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as lawyer advertising.