Navigating excuses for contractual performance under commercial leases
Due to the shutdowns associated with the COVID-19 crisis, commercial tenants have sought ways to excuse their contractual performance under their commercial leases. As has been discussed in significant detail, parties are primarily looking into whether their lease contains a force majeure provision which excuses such contractual performance. This is for good reason – the express language in the contract will always control. If your commercial lease includes a force majeure provision which covers the COVID-19 epidemic, then the parties have negotiated the terms of what is to occur in such event. Typically, commercial leases expressly and unambiguously state that the payment of rent or other monetary obligations are not excused by the force majeure event. However, if your commercial lease does not contain an express force majeure provision, or otherwise contains an unclear force majeure provision (specifically regarding the payment of rent), then there are a few legal defenses to performance that may be raised by commercial tenants.
One common argument is that contractual performance has been rendered impossible, or at a minimum highly financially impracticable, due to the shutdown of business. The Eighth District Court of Appeals recently held that “Impossibility of performance occurs where after the contract is entered into, an unforeseen event arises rendering impossible the performance of one of the contracting parties... However, a contracting party will not be excused from performance merely because performance may prove difficult, dangerous or burdensome.” In other words from another appellate court, “[a]lthough impossibility may conceivably arise in a variety of contexts, the inability to pay money or to render performance as a result of insolvency or some other financial difficulty has been held in certain circumstances not to constitute an excuse in law under the theory that a party generally assumes the risk of financial ability to perform when entering into any contract.
In a similar vein, tenants can argue that the COVID-19 epidemic has frustrated the underlying purpose of the commercial lease as the tenant has not been allowed to operate its business. Courts have held that if, after a contract is made, a party's principal purpose is substantially frustrated without his/her fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, the remaining duties to render performance could be discharged, unless the language or the circumstances indicate the contrary.”
The law provides only limited instances in which contractual performance is excused by reason of impossibility, impracticability or frustration of the underlying purpose of the contract. In the context of the COVID-19 epidemic, it is likely that simply relying on the financial difficulties imposed on a business would not be sufficient to excuse the payment of rent or other monetary obligations. Rather, a commercial tenant would need to show that the COVID-19 epidemic has destroyed a central aspect of the specific commercial lease. The key to this analysis is whether there is an explicit purpose noted in the commercial lease which has been taken away in its entirety due to the epidemic (as an example, the operating of a specific of type of business which has been deemed non-essential under the relevant stay at home orders).
With the opening up of the court systems beginning to occur, and eventual rulings and judgments on these novel legal issues, we should obtain some clarity as to these points within the next year or two at least. Until that time, commercial tenants and landlords need to navigate the legal issues presented by a commercial lease that does not contain an express and unambiguous force majeure provision.
If you are a landlord or tenant impacted by the massive dislocations caused by the economic shutdown, and would like to know how we can help you find creative solutions to resolving lease disputes, please reach out to any of the attorneys listed below.