If you’re like many business leaders, you don’t think much about your lease. The business needed a place to operate, thrive, and grow, and it did you just fine until… Bam! The coronavirus shut you down. Maybe you’ve been lucky enough to take some or all of your business online. And maybe your teams are working from home. That still leaves your empty commercial premises and the lease that has months or years to run.
Commercial leases frequently carry a clause for force majeure, literally “greater force”, which means something external that stops a party from being able to fulfill its end of the bargain. It amounts to a right not to perform the duties set out in your contract.
Generally, it’s used for large-scale disruptions such as natural disasters and war but there’s considerable precedent for pandemics, too.
Does that mean you may be able to get out of your lease agreement due to COVID-19? Yes. Does that mean it’s an open-and-shut case? Not exactly.
Commercial Contracts and the Pandemic
Though it may seem simplistic, decades of force majeure testing in court has developed a fairly strict set of standards for what constitutes a claim:
- The event must be beyond the reasonable control of the claimant,
- They must have been prevented from performing their obligation by it,
- They must have taken all reasonable steps to fulfill its obligations and tried to mitigate damages as a result, and
- They must give the other party timely notice in accordance with the agreement that they were not able to perform their obligations.
However, recent cases have highlighted some weaknesses in force majeure as an option. For example, while state or city shutdown orders would probably be considered an event beyond your reasonable control, you may not be covered if taking the voluntary advice from civic leaders to “please stay home” or you shut down to protect your staff.
Earlier this year, I described the lose-lose situation of conference postponement as a “handcuffing,” since the conference technically was still going ahead and vendors couldn’t claim force majeure, yet they were still taking a bath on nonrefundable hotels, travel, and associated marketing spend.
Force Majeure Clauses to Include in New Contracts
A team for Leech Tishman Fuscaldo & Lampl said even though it had been seven months since the pandemic disrupted businesses worldwide, companies were still trying to figure out how to perform their contractual obligations. The authors said tenants should ask for clauses that allow for rent abatement in situations where it is unable to operate the business from those premises.
Bloomberg Law goes a step further and recommends adding explicit pandemic and shutdown language to your contracts. This its suggested clause:
FORCE MAJEURE. Neither Party will be liable for any failure or delay in performing an obligation under this Agreement that is due to any of the following causes (which events and/or circumstances are hereinafter referred to as “Force Majeure”), to the extent beyond its reasonable control: acts of God, accident, riots, war, terrorist act, epidemic, pandemic, quarantine, civil commotion, breakdown of communication facilities, breakdown of web host, breakdown of internet service provider, natural catastrophes, governmental acts or omissions, changes in laws or regulations, national strikes, fire, explosion, generalized lack of availability of raw materials or energy; provided that the parties stipulate that Force Majeure shall not include the novel coronavirus Covid-19 pandemic which is ongoing as of the date of the execution of this agreement.
For the avoidance of doubt, Force Majeure shall not include (a) financial distress nor the inability of either party to make a profit or avoid a financial loss, (b) changes in the market prices or conditions, or (c) a party’s financial inability to perform its obligations hereunder.
It’s also worth noting that contracts signed during the COVID-19 pandemic cannot use it to claim force majeure since it cannot have come as a surprise.
Next Steps for Your Commercial Contract
If you have an existing lease you’re trying to get out of, there are a few things to consider before you claim force majeure, including:
- How long does your lease have to run and how does that compare to the anticipated length of legal proceedings?
- What are the risks and consequences of claiming a right not to perform? – For example on your lessor and other relationships?
- Do you have alternatives, such as negotiating a rent reduction or deferment?
- If you do want to bring a force majeure claim, are you satisfied that you have given timely notice?
- What evidence do you have to show that it was impossible for you to fulfill your obligations?
- Does your insurance cover losses resulting from the same events that caused you to not perform your obligations?
How can you make sure all your contracts have updated clauses relating to COVID-19 and future pandemics? You need a contract lifecycle management tool. Anapact helps you design, edit, store, and easily manage your contractual obligations and requirements. It also integrates with the tools you use every day. It keeps you out of redlining hell and focused on the needs of the business.