Looking For A Way Out: Force Majeure Clauses in NY Commercial Leases
May 14, 2020
By Bruce Feffer
As the COVID-19 pandemic rages on, businesses of every size and type are reeling from its effects. In New York City, many businesses remain closed, their very survival uncertain. As a result, many commercial tenants, from major national retail chains to small dental offices and other service providers, have fallen behind in rent payments or stopped paying altogether. In distress, businesses are looking for ways to cancel their leases or at least delay performance of their obligations. Suddenly, a legal concept many tenants had never heard of has become a familiar part of the current landlord-tenant landscape: force majeure.
A French term which translates literally as superior force, the force majeure clause is a provision in a lease or other contract that excuses one or both parties from performing their obligations in the event of an unforeseeable and unavoidable event (an “Act of God”) that renders performance impossible. A simple illustration would be where an earthquake destroys a factory, making it impossible for the manufacturer to supply the goods ordered by its customer. If a force majeure clause exists in their contract, the manufacturer might be excused from having to make and deliver the goods.
These days, commercial tenants are running to their lawyers, leases in hand, asking whether their leases contain force majeure provisions that would excuse them from paying rent, or even allow them to get out of their leases completely.
Essential things to know about force majeure clauses and how they affect a commercial tenant’s obligations and responsibilities:
Not every lease has one. It may seem obvious, but unless the lease has a force majeure clause, a tenant cannot rely on this concept to avoid performance of its obligations. In such cases, tenants must look for other provisions within the lease that might provide a way out. For example, some leases provide that if the landlord does not provide essential services for a specified period (say, 90 days) the tenant may terminate the lease.
Force majeure clauses must be specific. Historically, courts in New York have applied force majeure clauses strictly and narrowly. It has usually been required that for a particular event to be an excuse for non-performance of a lease obligation, that event must specifically be mentioned in the force majeure provision. For example, a tenant asserting that a pandemic is the basis for not paying rent or terminating the lease must be prepared to show that the clause specifically mentions “pandemic” as a permissible defense to non-performance of its lease obligations. Terms such as “health emergency” or “virus” might not be sufficient, while “natural disaster” or the more general “Acts of God” will be even less likely to support the tenant’s claim.
Performance must be impossible. Generally, in order to successfully rely on a force majeure clause in court, a tenant must demonstrate that the event (for example, the pandemic) must have been unforeseeable, unavoidable, and impossible to overcome. Conditions that make performance merely difficult or even extremely challenging will usually not suffice. For this reason, it is important to demonstrate that efforts were made to keep the business operational despite the pandemic. Such efforts might include applying for government financial assistance, a credit line from the bank, submitting an insurance claim, or taking other steps to keep the business going.
Notice requirements. Many leases require a tenant to notify the landlord, within a specified time and by a specified method, of the intent to assert a force majeure defense. Failure to fully comply with the notice requirements of the lease might undermine even the strongest legal argument.
Impossibility, Frustration & Impracticability. Without a force majeure clause, and absent other potentially helpful lease provisions, a tenant might still be able to avail itself of the common law concepts of Impossibility, Frustration and Impracticability. In essence, these concepts allow a party to a contract to argue that an unforeseen and unavoidable event had rendered performance of the contract either entirely impossible or extremely difficult and costly. An argument based on these common law principles will likely be countered with the assertion that such a defense could have been included in a force majeure clause in the lease if the asserting party had negotiated for it. Tenants must be prepared to explain why it was not.
As we move into the new world created by COVID-19, a global pandemic can no longer be considered unforeseeable. Proper drafting and negotiation of leases will require consideration of force majeure provisions that specifically include pandemics as a basis for non-performance. For now, tenants who do not have such language in their leases must explore other options. Consultation with a lawyer who can review your lease and offer advice is the best starting point.