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Volume X, Number 221

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August 06, 2020

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Understanding and Enforcing Force Majeure Clauses in Commercial Real Estate Leases During the COVID-19 Pandemic

If I cannot operate my business, am I liable for rent? If the government closed my tenant’s business, not me, why can’t I collect rent? These questions face thousands of commercial tenants and landlords during the COVID-19 pandemic. Central to these questions is the meaning and import of force majeure clauses in commercial leases.

What is force majeure?

Force majeure refers to “a superior force” impacting a party’s performance under a contract like a lease. Courts will interpret force majeure clauses in contracts in various ways depending on the language of the clause and the law of a given jurisdiction. In theory, however, the basic purpose of force majeure clauses is to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated. A force majeure clause can often list a series of events such as earthquakes, storms, floods, natural disasters, wars or other “acts of God” which the parties to a contract have agreed upon as excuses for nonperformance.

Force majeure does not cure all tenant default problems during COVID-19

Recently, a court in Illinois interpreted a force majeure clause, determining that a tenant was relieved of some of the tenant’s rent obligations as a result of an executive stay-at-home order. In In re Hitz Restaurant Group, 2020 Westlaw 2924523(U.S.B.C. N.D. Ill. E.D.), a court reasoned that a restaurant tenant that failed to make payments under a lease was liable for unpaid rent that came due before the Governor of Illinois’ order directing the closure of public businesses in mid-March 2020. That is because the order did not interfere with the tenant’s performance under the lease or its ability to perform.

Governor’s stay-at-home order excuses tenant’s post-order rent obligations

However, the court did determine that force majeure circumstances forgave a portion of the rent due after the stay-at-home order went into effect. The landlord argued that the tenant’s argument was tantamount to a claim that the tenant had a lack of money, which the lease’s force majeure provision expressly stated was not a basis for relief. The court concluded, however, that because the order amounted to a governmental act — expressly represented as a possible force majeure event in the lease — the tenant was obligated to pay only that portion of the rent representing the carryout/curbside business that continued during the stay-at-home order. The court reasoned that because the executive order closed the tenant’s in-house dining operations but allowed the tenant to continue operating its take-out service, the tenant was excused from paying 75% of its rent obligations while the executive order was in place.

Unanswered questions

The decision does not answer many questions. How will courts interpret more generally worded force majeure provisions that do not specifically reference governmental action? Similarly, the decision does not address what happens when the effect of a stay-at-home order is less clear. Also, it is not clear how a court would interpret a force majeure provision during the COVID-19 pandemic outside the context of an executive stay-at-home order. Is the pandemic alone sufficient to trigger force majeure modification? Finally, as states begin to allow businesses to reopen, but with restrictions like limitations on capacity, what effect does that have on a force majeure provision? The Hitz Restaurant Corp. reasoning also leaves that question unaddressed and for future consideration.

These kinds of issues abound as commercial rental properties come out of the COVID-19 quarantine. Responding in an informed and decisive manner and understanding the meaning and intent of typically obscure contract provisions like force majeure will be critical for successful tenants and landlords in 2020.

© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume X, Number 191

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About this Author

Carl R. Pebworth Real Estate & Construction Attorney Faegre Drinker Law Firm Indianapolis
Partner

Carl Pebworth represents clients in disputes and risk management involving real property and construction. A skilled litigator, he is adept at proactive risk management, early case assessment, motions practice, negotiating settlements, and successfully winning trials and appeals on behalf of clients. His goal is to identify and to achieve the best strategic outcome for clients in a collaborative, results-oriented manner.

Real Estate Litigation

Carl represents commercial property developers, commercial and industrial...

317-237-1267
Karen T. Moses Commercial Litigation Attorney Faegre Drinker Biddle & Reath Fort Wayne, Indiana
Partner

Drawing from more than 30 years in commercial litigation, Karen Moses partners with clients to craft and execute dispute resolution strategies that align with their business goals. She represents business clients and individuals in all stages of commercial and real property litigation, including alternative dispute resolution, trial and appeal.

Business & Real Estate Litigation

Karen has handled litigation involving breach of contract, breach of warranty, conversion, fraud, tortious interference, breach of fiduciary duty, construction and environmental issues and other real estate disputes. She advises clients in a diverse set of industries, including banking, automotive, retail and construction. She also devotes a significant amount of time to consumer-related pro bono work.

Karen has represented clients before the Supreme Court of Illinois, the Supreme Court of Indiana and the 7th Circuit Court of Appeals. She is a member of the Trial Bar of the United States District Court for the Northern District of Illinois.

260-460-1716
Carla R. Martin Real Estate Attorney Faegre Drinker Biddle & Reath Denver, CO
Associate

Carla Martin helps clients pave a way out of complex commercial legal disputes. She has concrete experience handling real estate matters arising from land use, easement and landlord-tenant issues, and has represented clients before federal and state court and regulatory agencies, such as the Colorado Board of Assessment Appeals.

Carla also regularly conducts complex insurance recovery actions for developers and other large policyholders, as well as general commercial litigation. She brings an unwavering tenacity to the table, partnering with clients to understand the full scope of...

303-607-3674