COVID-19 and Force Majeure Provisions: What We Learned

17
Mar 2022
COVID-19 and Force Majeure Provisions: What We Learned

            The COVID-19 pandemic, and the ensuing shutdowns borne of it, presented new issues for lawyers to sort through, especially in commercial leases.  Many commercial tenants were forced to close entirely or, at the very least, substantially.  Their revenue streams bottomed out (particularly in April and May of 2020) as a result making it difficult, if not impossible, to pay rent.

            Force majeure provisions exist in leases to create a legal cushion for landlords (and, depending on the negotiation of the lease, tenants) in fulfilling their obligations under the terms of the lease- if they are not able to perform as they’re required to due to something- earthquake/storm (“Acts of God”), civil unrest, epidemics, pandemics, etc.- completely out of their control, they are not deemed to be in default under the terms of the lease.  There is usually one glaring exception to the force majeure provisions: payment of rent.  Landlord expects to receive rent, regardless of whatever else happens.

            The COVID-19 crisis created an issue in this regard because tenants were not free to just stop paying rent and stood the risk of being held in default under the terms of the lease and evicted (sooner or later, depending on the holds on evictions issued by some governmental authorities).  It was further compounded by insurance companies, unsurprisingly, who refused to pay out on business interruption insurance policies (the losses they would have incurred would have been fatal to their companies). Most landlords we encountered during 2020 and 2021 (including my landlord clients) were willing to work with their tenants to ease the burden some (usually in the form of deferring rent over some term in the future).  This negotiation usually resulted in the deferred rent being added pro rata to the existing rent over some period in the future (for the twelve months after restrictions were lifted, or even sometimes over the remainder of the lease term).  However, I did not see any abatements (“reductions”) in rent and usually additional rent (pro rata taxes, insurance, common area maintenance, etc.) was expected to be timely paid.

            Now, due to this learning experience, in new leases that I am negotiating, I like to add a provision into the lease that does much of this automatically- at any time during the lease term where the tenant is forced to close in whole or in part due to no fault of its own, rent will be reduced automatically in pro rata amounts to their capacity reductions, and deferred until after the forced closure is lifted, at which time the deferred rent will be spread over some period of time. Further, if landlord receives some sort of principal and interest relief, I expect a pro-rata portion of that relief to be passed down to the tenant in a pro-rata share. A provision like this allows landlord and tenant to know exactly what will happen and gives them the flexibility to pivot together when forced shutdowns occur in the future.

 

For More: Scott K. Burger

Updated: March 17, 2022