Protecting Against the Possibility of Catastrophic Events: Careful Consideration of Force Majeure Clauses in Commercial Leases

When analyzing the effect that a catastrophe has upon the parties' obligations and rights under a commercial lease agreement, courts are constrained to follow the language of the lease itself, including the force majeure clause, to determine how the parties have allocated the risk of casualty. For example, the Supreme Court of New York County was required to determine whether a force majeure clause that covered 'acts of war' was intended to include the terrorist attacks of 9/11. See 1 World Trade Center LLC v. Cantor Fitzgerald Securities, et al., 2004 NY Slip. Op 24444. While acknowledging that the attacks were tragic and 'unanticipated,' the court nonetheless refused to relieve the commercial tenant from the operation of the force majeure clause (which released the landlord from its obligations under the lease) and held that the tenant had bargained away its right to hold the landlord liable for its nonperformance in light of the terrorist attacks, which the court deemed to be an 'act of war.' Id. 1 World Trade Center demonstrates both that courts will enforce force majeure clauses, even if enforcement requires the court to discern the parties' intent from nonspecific, boilerplate terms, and that courts are unlikely to relieve sophisticated parties from the 'benefit of their bargain,' even in the wake of a horrific tragedy.

In the event that the commercial lease does not contain a force majeure clause, common law or statutes in the jurisdiction where the property is located typically provide default rules that describe how the parties' rights and obligations are modified or even eliminated as a result of the catastrophe. Common law claims such as constructive eviction and the covenant of quiet enjoyment will not generally be useful to a tenant seeking rent abatement after a catastrophe because both claims were intended to provide protection against the possibility of a landlord's negligence or neglect, or at the very least to address circumstances within the landlord's control. Because catastrophes are by definition beyond their control, these common law remedies are unlikely to provide relief to commercial tenants who have failed to protect their interests through a force majeure provision in their leases. For this reason, many jurisdictions have enacted statutes that govern the parties' rights and obligations in the event of a catastrophe.

For example, those commercial tenants and landlords whose properties have been impacted by hurricanes such as Katrina and Rita, and whose commercial leases did not contain a force majeure provision, will have to look to the Louisiana Civil Code Articles 1873-1878 to determine whether a 'fortuitous event,' as defined by the Articles, has occurred, as well as to provide guidance on their respective rights and obligations. While the majority of jurisdictions provide a statutory framework like Louisiana's Articles for those commercial landlords and tenants that fail to include force majeure provisions in their commercial leases, wise commercial tenants and landlords will take advantage of the opportunity to define and protect their rights through carefully considering and negotiating the force majeure provisions of their commercial leases.

Not All Boilerplates Are Created Equal

Because many commercial leases come with standard boilerplate force majeure language, both parties must carefully examine the force majeure clause in the proposed lease and determine to what extent it actually protects against possible catastrophe and whether or not further negotiation is desired or necessary. Even though the lease agreement contains language routinely provided by the landlord, the landlord should not presume that seemingly neutral language will protect its rights; nor should it rely upon the standard and often vague language.

For example, a force majeure provision may read:

If Tenant is delayed or prevented from performing any of its obligations under the Lease by reason of strike, lockouts, riots, acts of God, or any other cause beyond the Tenant's control, the period of such delay or such prevention shall be deemed to extend the time period provided herein for the obligation of the performance of any of the Tenant's obligations under this Lease Agreement.

Alternatively, the provision may state:

If either party shall be delayed, hindered or prevented from the performance of any obligation or duty required by this Agreement by Force Majeure, then performance of such obligation or such duty shall be extended for a period of time equivalent to the period of such delay, provided however, that the foregoing does not apply to either Party's obligations to pay any monies due under this Agreement.

The obvious intent of the first provision is to protect the interests of the tenant without regard for the mutual obligations of the landlord, which include the suspension of the tenant's obligation upon the occurrence of a force majeure. This protection is specifically excluded in the second provision, which requires that the tenant continue to pay rent even after a force majeure may have deprived it of its ability to use the leased property. Furthermore, the second provision makes no effort to define force majeure, leaving that crucial term ambiguous and undefined as well as subject to later interpretation by the court ' which may expose either the tenant or the landlord to the possibility of uncertain obligations in the event of a catastrophe. Thus, it is clear that even 'boilerplate' language can benefit one party or the other, or may be deficient in ways that are detrimental to both the landlord and the tenant.

Specific Considerations When Drafting a Force Majeure Clause

Both parties may also want to consider whether they may want or need additional protections beyond those provided by traditional boilerplate language. A catastrophe may damage the leased premises to the point that it may no longer be suitable for the tenant's specific use, although the property may not be considered destroyed. For example, although the Twin Towers were completely destroyed and the lease property a 'total loss' for both the tenants and the landlords, many of the commercial properties affected by Katrina were not total losses, but rather were only partially damaged by either the hurricane itself or the resulting floods. In such a situation, if the tenant has relied upon the minimal protections afforded in a boilerplate force majeure provision, the tenant may be forced to continue to pay rent on the premises despite its inability to use the property for the purpose of operating its business.

Closely related, while force majeure provisions often call for the tenant to receive a rent abatement as a result of a catastrophic event that damages the leased building or premises, they typically do not address what will happen if a catastrophic event prevents a tenant from accessing the leased premises, even if the leased premises themselves are unaffected. For example, in the aftermath of 9/11 many tenants were unable to access their leased premises because much of downtown Manhattan was sealed off for a lengthy period of time. Similarly, after Katrina hit, all of New Orleans was evacuated and residents and owners were not permitted to return immediately, even if their own properties were not destroyed or only minimally damaged by the hurricane and flood. In many of these cases, the 'standard' force majeure provision would not relieve tenants of their obligation to pay rent because they were protected only against the possibility that their lease property was destroyed.

Similarly, even after tenants and owners may be able to return to their premises after a catastrophe, lingering effects may make such return impractical. For example, much of New Orleans remained (and still remains, as of the writing of this article) without essential services such as clean water and electricity, as well as a lack of both qualified employees and commercial patrons. Just as with the consequences of a catastrophe described above, which did not damage the leased premises itself, but nonetheless rendered it useless from the tenant's perspective, tenants must be aware that a catastrophe may devastate the community such that the tenant cannot continue to operate, despite the fact that its leased property remains intact.

Bearing these scenarios in mind, a force majeure clause should account for more than just the catastrophe itself, but also the possible lingering governmental and natural effects of it, including evacuations, lack of services, rebuilding difficulties and delays, restrictive governmental regulations, and building and occupancy permitting issues. This includes considering these events not only from a tenant's view of being released from rent obligations, but also from a landlord's view of being released from obligations to provide essential utilities and services and to repair and/or reconstruct premises. Commercial landlords in particular should carefully consider the possibility that they will want to retain the right to terminate the lease, rather than merely suspend it, in the event force majeure relieves a tenant of the obligation to pay rent.

Conclusion

In connection with contemplating possible scenarios that may trigger the force majeure clause and the attendant effects on the lease, the commercial landlord and tenant must also address issues such as lease termination, rent abatement, and restoration obligations as they may arise in less widespread catastrophic situations. In addition to the text of the lease agreement itself, tenants and landlords should look to other possible means of resolving their competing interests of self-protection in the event of a catastrophe.

Regardless of the ultimate outcome of the negotiations, the important lessons from the terrorist attacks and hurricane Katrina are that a carefully considered force majeure clause can serve to protect the interests of both the commercial landlord and the tenant in the aftermath of a tragedy and that both the landlord and the tenant are responsible to prepare for the possibility of events that everyone hopes will never occur.

Suzanne Ilene Schiller is a member of the Philadelphia law firm Spector Gadon & Rosen, P.C. Monica Mathews is an associate in the firm.

When commercial landlords and tenants negotiate commercial lease agreements, the normal focus of their efforts is the essential conditions of the tenancy ' rent amount, lease term, option periods, and the like. Often overlooked, however, are those provisions generally considered 'standard boilerplate.' Force majeure clauses, in particular, are frequently viewed as miscellaneous paragraphs not worthy of lengthy consideration or discussion. Unfortunately, the pitfalls of a failure to carefully negotiate the force majeure provision of a commercial lease are often realized when a true catastrophic event occurs. In such situations, the tenant may be least able to withstand any additional hardship and needs the protection that a well-drafted force majeure provision can afford. At the same time, owners of commercial real estate that have suffered through the recent catastrophic and tragic events such as the terrorist attacks of 9/11 and hurricanes Katrina and Rita unquestionably have learned all too well that the force majeure clauses of their leases may be the only means of ensuring invaluable protections if or when a catastrophic event does occur. (See 'Post 9/11 Insurance Lessons Learned from the Ensuing Case Law,' Commercial Leasing Law & Strategy, May 2006).

The Terms of the Lease Agreement Govern

Generally, a force majeure clause is intended to excuse performance by an obligated party upon the occurrence of events or causes that are generally outside that party's reasonable control. A typical force majeure clause excuses a tenant from its obligation to pay rent upon the destruction of the leased premises; however, a force majeure clause may be drafted to excuse any of the obligations under the lease agreement owed by either the landlord or the tenant. The broader a force majeure clause is, the more likely it will be to excuse the performance of the party obligated to take the action in question.

When analyzing the effect that a catastrophe has upon the parties' obligations and rights under a commercial lease agreement, courts are constrained to follow the language of the lease itself, including the force majeure clause, to determine how the parties have allocated the risk of casualty. For example, the Supreme Court of New York County was required to determine whether a force majeure clause that covered 'acts of war' was intended to include the terrorist attacks of 9/11. See 1 World Trade Center LLC v. Cantor Fitzgerald Securities, et al., 2004 NY Slip. Op 24444. While acknowledging that the attacks were tragic and 'unanticipated,' the court nonetheless refused to relieve the commercial tenant from the operation of the force majeure clause (which released the landlord from its obligations under the lease) and held that the tenant had bargained away its right to hold the landlord liable for its nonperformance in light of the terrorist attacks, which the court deemed to be an 'act of war.' Id. 1 World Trade Center demonstrates both that courts will enforce force majeure clauses, even if enforcement requires the court to discern the parties' intent from nonspecific, boilerplate terms, and that courts are unlikely to relieve sophisticated parties from the 'benefit of their bargain,' even in the wake of a horrific tragedy.

In the event that the commercial lease does not contain a force majeure clause, common law or statutes in the jurisdiction where the property is located typically provide default rules that describe how the parties' rights and obligations are modified or even eliminated as a result of the catastrophe. Common law claims such as constructive eviction and the covenant of quiet enjoyment will not generally be useful to a tenant seeking rent abatement after a catastrophe because both claims were intended to provide protection against the possibility of a landlord's negligence or neglect, or at the very least to address circumstances within the landlord's control. Because catastrophes are by definition beyond their control, these common law remedies are unlikely to provide relief to commercial tenants who have failed to protect their interests through a force majeure provision in their leases. For this reason, many jurisdictions have enacted statutes that govern the parties' rights and obligations in the event of a catastrophe.

For example, those commercial tenants and landlords whose properties have been impacted by hurricanes such as Katrina and Rita, and whose commercial leases did not contain a force majeure provision, will have to look to the Louisiana Civil Code Articles 1873-1878 to determine whether a 'fortuitous event,' as defined by the Articles, has occurred, as well as to provide guidance on their respective rights and obligations. While the majority of jurisdictions provide a statutory framework like Louisiana's Articles for those commercial landlords and tenants that fail to include force majeure provisions in their commercial leases, wise commercial tenants and landlords will take advantage of the opportunity to define and protect their rights through carefully considering and negotiating the force majeure provisions of their commercial leases.

Not All Boilerplates Are Created Equal

Because many commercial leases come with standard boilerplate force majeure language, both parties must carefully examine the force majeure clause in the proposed lease and determine to what extent it actually protects against possible catastrophe and whether or not further negotiation is desired or necessary. Even though the lease agreement contains language routinely provided by the landlord, the landlord should not presume that seemingly neutral language will protect its rights; nor should it rely upon the standard and often vague language.

For example, a force majeure provision may read:

If Tenant is delayed or prevented from performing any of its obligations under the Lease by reason of strike, lockouts, riots, acts of God, or any other cause beyond the Tenant's control, the period of such delay or such prevention shall be deemed to extend the time period provided herein for the obligation of the performance of any of the Tenant's obligations under this Lease Agreement.

Alternatively, the provision may state:

If either party shall be delayed, hindered or prevented from the performance of any obligation or duty required by this Agreement by Force Majeure, then performance of such obligation or such duty shall be extended for a period of time equivalent to the period of such delay, provided however, that the foregoing does not apply to either Party's obligations to pay any monies due under this Agreement.

The obvious intent of the first provision is to protect the interests of the tenant without regard for the mutual obligations of the landlord, which include the suspension of the tenant's obligation upon the occurrence of a force majeure. This protection is specifically excluded in the second provision, which requires that the tenant continue to pay rent even after a force majeure may have deprived it of its ability to use the leased property. Furthermore, the second provision makes no effort to define force majeure, leaving that crucial term ambiguous and undefined as well as subject to later interpretation by the court ' which may expose either the tenant or the landlord to the possibility of uncertain obligations in the event of a catastrophe. Thus, it is clear that even 'boilerplate' language can benefit one party or the other, or may be deficient in ways that are detrimental to both the landlord and the tenant.

Specific Considerations When Drafting a Force Majeure Clause

Both parties may also want to consider whether they may want or need additional protections beyond those provided by traditional boilerplate language. A catastrophe may damage the leased premises to the point that it may no longer be suitable for the tenant's specific use, although the property may not be considered destroyed. For example, although the Twin Towers were completely destroyed and the lease property a 'total loss' for both the tenants and the landlords, many of the commercial properties affected by Katrina were not total losses, but rather were only partially damaged by either the hurricane itself or the resulting floods. In such a situation, if the tenant has relied upon the minimal protections afforded in a boilerplate force majeure provision, the tenant may be forced to continue to pay rent on the premises despite its inability to use the property for the purpose of operating its business.

Closely related, while force majeure provisions often call for the tenant to receive a rent abatement as a result of a catastrophic event that damages the leased building or premises, they typically do not address what will happen if a catastrophic event prevents a tenant from accessing the leased premises, even if the leased premises themselves are unaffected. For example, in the aftermath of 9/11 many tenants were unable to access their leased premises because much of downtown Manhattan was sealed off for a lengthy period of time. Similarly, after Katrina hit, all of New Orleans was evacuated and residents and owners were not permitted to return immediately, even if their own properties were not destroyed or only minimally damaged by the hurricane and flood. In many of these cases, the 'standard' force majeure provision would not relieve tenants of their obligation to pay rent because they were protected only against the possibility that their lease property was destroyed.

Similarly, even after tenants and owners may be able to return to their premises after a catastrophe, lingering effects may make such return impractical. For example, much of New Orleans remained (and still remains, as of the writing of this article) without essential services such as clean water and electricity, as well as a lack of both qualified employees and commercial patrons. Just as with the consequences of a catastrophe described above, which did not damage the leased premises itself, but nonetheless rendered it useless from the tenant's perspective, tenants must be aware that a catastrophe may devastate the community such that the tenant cannot continue to operate, despite the fact that its leased property remains intact.

Bearing these scenarios in mind, a force majeure clause should account for more than just the catastrophe itself, but also the possible lingering governmental and natural effects of it, including evacuations, lack of services, rebuilding difficulties and delays, restrictive governmental regulations, and building and occupancy permitting issues. This includes considering these events not only from a tenant's view of being released from rent obligations, but also from a landlord's view of being released from obligations to provide essential utilities and services and to repair and/or reconstruct premises. Commercial landlords in particular should carefully consider the possibility that they will want to retain the right to terminate the lease, rather than merely suspend it, in the event force majeure relieves a tenant of the obligation to pay rent.

Conclusion

In connection with contemplating possible scenarios that may trigger the force majeure clause and the attendant effects on the lease, the commercial landlord and tenant must also address issues such as lease termination, rent abatement, and restoration obligations as they may arise in less widespread catastrophic situations. In addition to the text of the lease agreement itself, tenants and landlords should look to other possible means of resolving their competing interests of self-protection in the event of a catastrophe.

Regardless of the ultimate outcome of the negotiations, the important lessons from the terrorist attacks and hurricane Katrina are that a carefully considered force majeure clause can serve to protect the interests of both the commercial landlord and the tenant in the aftermath of a tragedy and that both the landlord and the tenant are responsible to prepare for the possibility of events that everyone hopes will never occur.

Suzanne Ilene Schiller is a member of the Philadelphia law firm Spector Gadon & Rosen, P.C. Monica Mathews is an associate in the firm.