03/26/2020 by Duggan O'Dea, Esq.
To date, COVID-19 has led to the forced closures of many businesses and commercial spaces worldwide, both temporarily and permanently. While some can adapt and continue to work in safe numbers or controlled environments, others have been left with no alternatives, resulting in unemployed and unproductive workers and workspaces. So, what does this mean for commercial leasing relationships now that once-profitable businesses have stalled due to the COVID-19 lockdowns? Many may look to their leases for relief in the form of a force majeure clause.
What is a Force Majeure Clause?
Force Majeure – “superior force” – is a common contract provision which temporarily excuses a party from its obligations as a result of certain extreme and unforeseen circumstances. Depending on the specific language, a force majeure provision may provide relief to the burdened party until normal operating activities can be assumed.
The specific language of the force majeure clause is very important. The length, language, and detail of a force majeure clause vary greatly by contract, making its application subjective to the contract at issue. Further, it is important to note that not all contracts include a force majeure clause.
The ability to benefit from a force majeure clause is heavily dependent upon: (1) whether the language of your contract’s provision covers the event in question, (2) whether the event in question directly hinders fulfillment of the contractual obligations, and (3) whether the particular obligation sought to be excused is covered by the provision. Unless all criteria are met, it is unlikely that the noncompliant party can look to the clause as an excuse for its noncompliance. In particular, many commercial leases expressly state that the payment of rent is not excused by a force majeure event. Again, each lease must be reviewed individually to determine whether rent payment, or any other obligation, would be excused by force majeure.
While some force majeure clauses are more detailed, others are less so, leaving room for interpretation of what events may be covered by the clause. In interpreting the clause’s scope and effect, a court will analyze those events that are expressly contemplated in the language of the contract. Thus, the common force majeure phrase “or any other event beyond the party’s reasonable control” is not necessarily a blanket release from contractual obligations.
Courts also consider whether the event causes more than simply economic hardship or impracticality. Notably, Virginia courts do not recognize the “frustration of purpose” doctrine. While some event may cause contractual performance to be extremely burdensome and costly, if performance does not become impossible, a court will be unlikely to interfere with the terms of the contract and excuse the noncompliant party’s breach.
How does a Force Majeure Clause operate under COVID-19?
The COVID-19 outbreak has put Force Majeure clauses under the microscope. While it has been internationally deemed a “pandemic,” that does not necessarily mean COVID-19 is, triggers force majeure relief. In Virginia, that requires a contract specific analysis of the force majeure clause. So, unless the contract specifies “pandemic” or “epidemic” (or other similar viral event verbiage) within the actual force majeure clause, a party will likely be unsuccessful in asserting force majeure for relief under the contract. Other operative language in the force majeure clause are terms such as “governmental restrictions” or “emergency government action,” which may be applicable to certain closures and interruptions caused by COVID-19.
The attorneys at Vandeventer Black LLP stand ready to assist you in analyzing your options both as a landlord or commercial tenant if you believe that your contractual rights are in jeopardy.
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About the Author
Duggan practiced corporate law with an emphasis on structured finance and securitization at a top “AMLAW 200” international firm. Today, his practice focuses on corporate governance and general business counsel, including real-estate matters and corporate-finance transactions. He assists companies throughout the full lifecycle of operations from formation to new acquisitions and dissolution or sale, and everything in between, including employment-related issues.