Understanding the Force Majeure Clause and COVID-19

Understanding the Force Majeure Clause and COVID-19

Following the outbreak of COVID-19, stringent lockdown procedures have been implemented in many places around the world, disrupting the daily operations of businesses everywhere. Tenants whose businesses are facing a potential shut down because of government restrictions are all asking the same question — what options are at our disposal if the pandemic begins affecting, or has already affected, our ability to pay rent?

In particular, tenants are wondering whether they can rely on what has been termed a force majeure clause in their lease agreements to relieve them of their obligations as a tenant. In other words, can a force majeure clause save you next month’s rent payment? The answer: It depends.

Several factors influence the application of force majeure provisions, including the exact wording of the clause and the specific facts of the case. These clauses tend to be interpreted narrowly, with close attention paid to what constitutes a force majeure event according to contractual wording.

Tenants in several countries are now citing the COVID-19 pandemic as a force majeure that renders them unable to deliver rent to their landlords. But from a legal perspective, the inflexible wording of most real estate leases make it difficult for such tenants to accomplish this successfully. The process of invoking a force majeure isn’t as easy as it may seem.

Keep in mind that this article does not offer qualified legal advice. For an expert opinion on whether the force majeure clause in your lease agreement can be relied on to excuse your rent for the upcoming month, try getting in touch with a corporate or commercial lawyer, who will be well-equipped to deconstruct the specific language of your contract and to provide you with a definitive answer.

What Is a Force Majeure Clause?

Force majeure is a Latin term meaning “superior force.” A force majeure clause, otherwise known as an act of God clause, is commonly incorporated into most contracts, including lease, loan, and development contracts.

A force majeure is an extraordinary event or circumstance that happens beyond the reasonable control of the contractual parties, rendering them unable to fulfill their respective obligations.

Examples of force majeure events may include natural disasters, earthquakes, hurricanes, volcanic eruptions, war, plague, acts of terrorism — essentially any event that can be viewed as an act of God, or beyond reasonable human foresight or ability. You might think that the COVID-19 pandemic falls neatly between these lines, but the reality is not so cut and dry.

For the COVID-19 pandemic to be legally classified as a force majeure, the language in the force majeure clause will likely need to explicitly denote a pandemic, epidemic, or public health emergency as events that qualify. Fortunately, following the SARS epidemic in 2003, many contracts were since written to capture infectious outbreaks. In any case, the first step is always to have a legal professional review the specific wording of your lease agreement.

If the force majeure clause in your lease doesn’t explicitly list a pandemic, COVID-19 may still be interpreted as a force majeure if the pandemic is judged to qualify as an act of God, an example of a plague, or more generally as an event beyond reasonable human control. While you might think that such readings of the outbreak are fairly straightforward, these interpretations are very rarely made lightly.

Keep in mind that in practice, force majeure clauses don’t let contractual parties off the hook completely. Most clauses are written so that a party’s non-performance isn’t entirely excused and is only suspended for the duration of the force majeure event.

Something else that’s important to keep in mind is your obligation to avoid and mitigate aspects of the pandemic that can be reasonably anticipated. Some contracts will specify each party’s responsibilities with respect to mitigation.

Even if your lease agreement mentions nothing regarding mitigation, neglecting to mitigate can put you out of favor in court if you’re seeking to invoke a force majeure clause. So if you’re planning to legally raise a force majeure argument, it’s a good idea to keep track of your mitigation efforts ahead of time.

Is COVID-19 a Force Majeure Event?

Courts take into account several factors when evaluating whether an event can be classified as a force majeure. Concepts like controllability, foreseeability, and ability to perform are brought into the conversation whenever an individual is seeking to rely on a force majeure clause.

1. Controllability

A force majeure clause relieves contractual parties of their obligations in the face of an event or circumstance that falls outside any reasonable realm of control. Reliance on the clause is less likely when the factors leading to unfulfilled obligations are found to be entirely controllable.

For example, if a force majeure argument is brought up as an excuse for poor money management, its chances of holding up in court are very slim. In general, the party seeking to release themselves must be judged to have been capable and willing, prior to the force majeure event, to meet their obligations.

In other words, is the inability of any party to fulfill their part of the contract within their scope of control?

2. Foreseeability

The concept of foreseeability is relevant for clients who entered into contracts despite being fully informed and aware of an oncoming pandemic. While the COVID-19 outbreak itself was by no means predictable, it can be argued that at some point in time, the consequences of the pandemic became foreseeable.

Clients who signed off on contracts despite being aware that they’ll likely face challenges in fulfilling the obligations outlined in such contracts may not be able to rely on a force majeure clause to relieve themselves.

In other words, could this have been predicted?

3. Ability to Perform

Depending on the exact wording of your lease agreement (phrases such as “renders impossible” and “prevents” are relevant), the level of interference the force majeure event has caused with respect to your ability to fulfill contractual obligations will be scrutinized.

For today’s tenants looking to rely on a force majeure clause, the COVID-19 pandemic must be found to have a concrete, direct impact on your ability to pay rent. If the impact of the force majeure event was avoidable or the obligation has only become more expensive — but not impossible — to perform, the argument is less likely to be successful in court.

In other words, has the event really impacted the ability to pay and/or operate, or has it simply become more difficult, but is still possible within reasonable parameters.
For today’s tenants looking to rely on a force majeure clause, the COVID-19 pandemic must be found to have a concrete, direct impact on your ability to pay rent. If the impact of the force majeure event was avoidable or the obligation has only become more expensive — but not impossible — to perform, the argument is less likely to be successful in court.

To learn more about force majeure and your options as a tenant in the face of the COVID-19 crisis, contact CHI Real Estate by calling 647-347-9723.