COVID-19: Landlords and Tenants – Force Majeure and the Commercial Lease
One concept that is becoming familiar to Landlords and Tenants as a result of the COVID-19 Pandemic is force majeure. Force majeure is latin for “superior force”. It is related to the concept of an act of God, an unanticipated event for which no party can be held accountable. In commercial leases, the most common solution to dealing with an unanticipated event, such as the COVID-19 pandemic, is a force majeure clause.
Force Majeure can only be invoked if it is provided for in the lease. Therefore, as a first step the landlord or tenant should check the wording of a lease for a force majeure clause (sometimes also found under the heading “Unavoidable Delay”). A force majeure clause allocates risks for future events that are beyond the control of the Landlord or Tenant. Such a clause typically contains a list of specified triggering events and a catch all phrase to cover events not specifically listed in the clause. Common events include:
1. acts of God such as landslides, floods, earthquakes and storms;
2. wars and acts of terrorism;
3. labour strikes; and
4. changes in laws, orders and regulations.
The catch all phrase usually includes events which are unforeseeable and outside the parties’ control. For example, “other similar events beyond the reasonable control of the parties”. As a result of such broad wording there will be several arguments on both sides of whether the event falls within the catch all phrase. A court faced with this issue will interpret the catch all phrase based on its plain and ordinary meaning, its relation to the rest of the clause and the purpose of the contract as a whole. Force majeure clauses are interpreted narrowly by Courts.
Assuming the event is within the parameters of the force majeure clause the next step is to determine whether the force majeure event has actually and directly impacted the Landlord or Tenant’s ability to perform its contractual obligations. The force majeure event must be the event that is preventing the Landlord or Tenant from performing its obligations. This is often a very fact dependent analysis.
It is important to point out that many force majeure clauses require a party to give notice and any such notice provision must be strictly followed. Also, a party relying on a force majeure clause has an obligation to mitigate the impact of the event.
Finally, the force majeure clause will also have wording specifying the effect on the Landlord and Tenant’s obligations. These obligations may be entirely discharged, partially excused, delayed into the future, or have no effect at all. The majority of leases specify that the obligations of landlords and tenants under the lease are suspended, but rent is specifically excluded. This would mean that even if the force majeure clause is applicable the tenant still has to pay rent.
For tenants it is highly recommended that you contact your insurance company. Most insurance policies require that you notify the insurer of any material change in circumstances. A failure to do so could void the insurer’s obligation to pay in the event of a claim. You may also want to ask your insurer if there is any coverage under the policy for any other losses.
In addition, both landlords and tenants should explore any government programs that may provide funds to assist with the effects of the COVID-19 outbreak.
If you are a landlord or tenant and have any questions with respect to your commercial lease and your rights and obligations in the face of COVID-19, please do not hesitate to contact our office and we will be happy to assist you.
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice.