In addressing the respective rights and obligations of commercial landlords and tenants under a lease during the time of coronavirus, most of the focus has been on the force majeure provision in the lease and whether the coronavirus would, in fact, be identified as a force majeure.
Virtually all commercial leases will contain a force majeure provision, most will be written broadly enough (including a catch all provision) to include the coronavirus as part of force majeure under the lease. However, to the benefit of landlords and detriment of tenants, most force majeure provisions typically provide that rent payments is required from the tenant even if the particular circumstance is a force majeure event.
The stated position that rent is to be paid in all circumstances presents an obstacle for tenants to overcome in looking for a defense to payment of rent. Courts could take the view that the language of the force majeure provision means that the cost of risk was negotiated between the landlord and the tenant and, in so doing, the tenant has agreed to bear such cost.
There are, however, other defenses available to tenants under contract law, which exist mostly outside of the concept of force majeure and which could be applied by tenants under a lease. These are the two related concepts of “impossibility of performance” and its cousins “frustration of purpose” and “commercial impracticability”.
Initially contract law recognized three classes of supervening impossibility of performance: (1) impossibility due to the destruction of the subject matter (where the contract called for specific subject matter), (2) impossibility due to the death of one of the parties (where personal performance was required), and (3) impossibility caused by a subsequent change of law or by the subsequent act of the state by whose law the contract was governed. Over time an additional related doctrine developed: the doctrine of the “frustration of the venture” where the question was not impossibility but rather impracticability. This concept has grown into the present-day concepts of “frustration of purpose” and “commercial impracticability”.
In Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D.C. Cir. 1996), for example, the Court of Appeals for the District of Columbia recognized that the doctrine of impossibility had been loosened as the commercialization of business and of people’s lives had expanded and had grown to include “commercial impracticability”, but that something is impracticable when it can only be done at an excessive or unreasonable cost. Under this, three (3) things are required for the defense: (i) something unexpected occurred, (ii) the risk of the unexpected event must not have been allocated by either agreement or by custom, and (iii) the occurrence must have rendered performance commercially impracticable.
In Mishara Const. Co. v. Transit-Mixed Concrete Group, 365 Mass. 125 (1979) the Massachusetts Supreme Judicial Court (“SJC”), called the doctrine of frustration of purpose a “companion rule” to the doctrine of impossibility since both doctrines concern the effect of supervening circumstances upon the rights and duties of the parties. The difference between frustration of purpose and impossibility lies in the effect of the supervening event. Under frustration, performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by the unforeseen event. In both doctrines the principal question is whether in such an unanticipated circumstance the risk should be fairly thrown entirely on the promisor (tenant). The Court pointed out that this definition of frustration is nearly identical to the defense of “commercial impracticability” found in the U.C.C.
In Mishara, the SJC stated that the impracticability, namely commercial impracticability as opposed to impossibility, must have been caused by an occurrence the non-occurrence of which was a basic assumption upon which the contract was made. The court noted that absolute impossibility exists only rarely in the modern age and that the spectrum of impossibility should be tempered somewhat to include circumstances drastically increasing the difficulty and the expense of the contemplated performance – namely impracticability/frustration.
The Mishara court went on to state that such impossibility/frustration cases are essentially aimed at the distribution of certain kinds of risks and that a court should look to see if the contract itself establishes any such allocation between the parties. The court stated that it is implicit in the doctrine of impossibility (and the companion rule of frustration of purpose) that certain risks are so unusual and have such severe consequences that they must have been beyond the scope of the assignment of risks inherent in the contract. To require performance in such a case would be to grant an advantage for which the promisee (landlord) could not be said to have bargained for in the making of the contract.
While the courts generally will consider impossibility of performance or frustration of purpose, they are skeptical and reluctant to find them where economic conditions have changed within understandable fluctuations in a modern market-based economy. But they are more open to those claims when the occurrence is an unanticipated act of god, government action, or major catastrophic event that are completely outside normal market fluctuations.
It is possible that the advent of coronavirus, coupled with the various government shut down orders, would meet the requirements for frustration of purpose and commercial impracticability, and could even be one of those rare instances where impossibility of performance would apply. Except for leases executed very recently, the coronavirus itself could not have been anticipated by the parties at the time of the execution of the lease. As the SJC pointed out in Mishara, to require the payment of rent in such case would allocate all risk regarding the unanticipated event to the tenant and provide the landlord with an advantage for which he (the landlord) could not be said to have bargained.
It is important to note that each lease is generally negotiated independently and may have its own particular circumstances and set of facts. Landlord responses to claims of frustration of purpose, commercial impracticability, or impossibility may vary as well. Tenants should keep in mind that these defenses each raise a more difficult time question. For example, impossibility could exist only for the period of the Governor’s shutdown order or for a larger period of time, if (for example) tenant employees are reluctant and unwilling to return to work. If the extent of time exceeds say three (3) months and the tenant’s business is no longer feasible, the impossibility of performance may present a termination right.
These are some of the issues Massachusetts courts will have to address. In the meantime, tenants should know that, despite what their leases may say, there are avenues available that they should consider before accepting the landlord’s claim that rent is due in all circumstances. As the crisis drags on and re-opening plans emerge, this is a good time for tenants to look critically at their leases and plan how to handle their next rent payments.
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