How Does the Corona Virus (Covid-19) Affect My Commercial Lease
The relationship between a landlord and a commercial tenant depends on the contract. The first thing that any party with concerns about lease obligations should do – landlord or tenant – is to look to the terms of the lease. Is there a force majeure provision in the lease? What are the terms that trigger the force majeure? Examine the details of these terms carefully.
A commercial lease force majeure clause generally contains the following: which party is excused from performance; a list of qualifying force majeure events; which lease obligations are excused; and the possible remedies for each party. The typical force majeure clause in a commercial lease allows certain lease obligations to be postponed or avoided in the event of a significant disruption beyond the reasonable control of either party. Exactly which requirements of the lease the force majeure measure excuses are unique to that contract, as are the events that might trigger it. These events are often unforeseeable and outside the common risks of business.
Under the terms of the lease, the invocation of the force majeure clause will not be seen as a default and will not incur the usual associated penalties. Commercial leases will also frequently contain their own definition of what constitutes a force majeure, and these definitions may differ from lease to lease. Additionally, it is necessary for a reader to be aware of all of the parties involved in the agreement and the status of each one when analyzing a commercial lease agreement. Some force majeure clauses may apply only to the lessor, and others only to the lessee.
Some lease agreements limit force majeure triggers to only those events explicitly named in the contract. Others have a measure of flexibility when determining what qualifies as a force majeure trigger. Important terms that could signal the parties’ intention to include additional events are ‘acts of God’ and ‘including, but not limited to.’ A reader must determine the strictness of the contract’s language, as it will be the first thing that a court will turn to when making its decision.
However, even for inclusive contracts, it is important to note that courts will often interpret force majeure clauses narrowly. “[T]he clause will generally only excuse a party’s nonperformance if the event that caused the party’s nonperformance is specifically identified.” Kyocera Corp. v. Hemlock Semiconductor, LLC, 886 N.W.2d 445 (Mich. Ct. App. 2015). (In which a court ruled that a market downturn which made the contract extremely unprofitable did not excuse performance of contract under the force majeure clause). The more closely a force majeure clause resembles the event a party claims as a trigger, the more likely that the party invoking it will be successful if the matter goes before a judge.
Many force majeure clauses require that the invoker of the clause make a good faith effort to cure the problem. While most lessors and lessees can do little in the face of strict executive orders intended to curb the spread of COVID-19, those who are considering triggering a force majeure clause should attend to the every detail, and guarantee that all they could have done to avoid the situation was indeed done. Invocations of force majeure clauses have been invalidated if the court found that a party did not reasonably act to meet their responsibilities outlined in the lease. “A force majeure clause cannot be invoked to excuse performance where the delaying condition was caused by the lessee and could have been prevented by the exercise of prudence, diligence, and care.” Erickson v. Dart Oil & Gas Corp., 189 Mich. App. 679, 688, 474 N.W.2d 150, 155 (1991).
Ambiguities in Lease Language
COVID-19 has created a sea of uncharted waters, and each business is operating under its own unique set of circumstances. There may be times when, despite the efforts of the drafters, the text of the lease agreement just is not clear. When the parties to the lease cannot agree on its intended meaning, the courts will take up the issue.
A commercial lease is essentially a contract between the parties involved. The initial question of whether the language of a contract is ambiguous or not “is a question of law for the trial court.” Glenwood Shopping Ctr. Ltd. P’ship v. K Mart Corp., 136 Mich. App. 90, 99, 356 N.W.2d 281, 286 (1984). (In which the court was called upon to examine an ambiguity in a commercial lease regarding utilities pricing). However, if a contract contains language that is ambiguous, unclear, or open to multiple interpretations, a court will treat the intended meaning of the contract as a question of fact. Tel-Towne Props. Grp. v. Toys “R” Us-Delaware, Inc., 123 F. App’x 656, 660 (6th Cir. 2005). (In which a commercial lease’s termination date was interpreted differently by the lessor and the lessee).
The phrases ‘question of law’ and ‘question of fact’ are terms of art that affect how the contract is reviewed by the court. A question of law is a “question arising in a case in court as to the terms of the law by which the case is to be adjudicated.” Question of Law, Ballentine Law Dictionary. (2010). A question of fact is “[a] question regarding past events. An issue of fact is a dispute between the parties in which each party asserts a version of actions or events in the past that differs from the other in some material way.” Issue of Fact (Question of Fact or Factual Issue), The Wolters Kluwer Bouvier Law Dictionary Desk Edition. (2012). “[F]actual issues are defined as basic, primary, or historical facts: facts in the sense of a recital of external events and the credibility of their narrators.” Martinez v. Spencer, 195 F. Supp. 2d 284, 292 (D. Mass. 2002).
No commercial lease exists in a vacuum. In addition to the terms of the lease itself, there are outside forces that can affect the execution of the lease. In an effort to cushion the worst of the economic blow, some cities, counties, and states have issued a moratorium on evictions. Months after the first COVID-19 case was reported in the United States, actors at all levels of government continue to issue orders and regulations that may have a significant effect on lease obligations. In the current economic climate, it makes good business sense to closely monitor the news.
The requirements of some commercial leases may be completely at odds with new governmental regulations related to public safety. Some leases with commercial spaces require the business to be open for a minimum number of hours a month that are now impossible to fulfil. Another business might be located inside a larger business that has shut its doors. Even a commercial lessee that is able to reopen may find itself intolerably hampered by social distancing requirements. In addition to invoking a force majeure clause, a business that is seeking to bring its lease more in line with realistic expectations should consider looking into the doctrines of impossibility and frustration of purpose as well.
Impossibility and frustration of purpose are both legal frameworks that courts use as part of their procedure for examining contract law. Despite its name, absolute impossibility is not required under the doctrine of impossibility, but “there must be a showing of impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.” Roberts v. Farmers Ins. Exch., 275 Mich. App. 58, 74, 737 N.W.2d 332, 342 (2007). Frustration of purpose differs from impossibility in that there does not need to be anything physically, legally, or otherwise extreme impeding performance. Instead, the doctrine is generally asserted when “a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract.” Liggett Rest. Grp., Inc. v. City of Pontiac, 260 Mich. App. 127, 133-34, 676 N.W.2d 633, 637 (2003). However, like force majeure, courts tend to be strict in their interpretations of both the doctrines of impossibility and frustration of purpose as well.
All indications are that the repercussions of COVID-19, and the public response, will continue for months, or even years to come. The past cannot be changed, but a business looking to protect its interest in the future would benefit from only entering upcoming leases that contain strong, clear force majeure clauses that address the threat of COVID-19. The best way for a party to a commercial lease to protect itself in the present is to understand all the terms of the lease – especially the force majeure clauses – before taking action.