Clarifying the Force Majeure Clause in a Commercial Lease

[Editor's Note: A&FP articles in March and April discussed how various 'boilerplate' clauses in a commercial lease may one-sidedly favor the landlord or tenant. The present article emphasizes the need to ensure that the force majeure clause in particular protects vital interests in the event of a major catastrophe. Whether your firm is a tenant or landlord, you'll want to take a close look, first at this article and then at your lease.]

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, how-ever, 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 only 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. Commercial real estate owners who suffered through the terrorist attacks of 9/11 and hurricanes Katrina and Rita learned all too well that the force majeure clauses of their leases may be the only means of ensuring invaluable protections if a catastrophic event does occur. (See, 'Post 9/11 Insurance Lessons Learned from the Ensuing Case Law,' Commercial Leasing Law & Strategy, May 2006).

Terms of the Lease Govern

Generally, a force majeure clause is intended to excuse performance by an obligated party upon the occurrence of events that are outside that party's reasonable control. A typical force majeure clause excuses a tenant from the 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 to determine how the parties have allocated the risk of casualty. For example, the Supreme Court of New York County determined that 'acts of war' in a particular lease's force majeure clause was intended by the parties to include events such as the terrorist attacks of 9/11. This force majeure clause released the landlord from its obligations under the lease, so the court held that the commercial tenant had bargained away its right to hold the landlord liable for nonperformance after the attacks. 1 World Trade Center LLC v. Cantor Fitzgerald Securities, et al., 2004 NY Slip. Op 24444.

The 1 World Trade Center ruling demonstrates that: a) courts will respect force majeure clauses, even if enforcement requires the court to discern the parties' intent from nonspecific, boilerplate terms; and b) courts are unlikely to relieve sophisticated parties from the 'benefit of their bargain' even in the wake of a horrific tragedy.

When the Lease Is Silent

If a 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, by a catastrophe.

Common law claims such as constructive eviction and the covenant of quiet enjoyment generally are not useful to a tenant seeking rent abatement after a catastrophe. Those claims were intended to provide protection against circumstances within the landlord's control, and catastrophes are by definition beyond the landlord's control.

Many jurisdictions have enacted statutes that govern the parties' rights and obligations in the event of a catastrophe. For example, for Louisiana properties affected by hurricanes Katrina and Rita, commercial leases without a force majeure provision are construed according to Louisiana Civil Code Articles 1873-1878. If a 'fortuitous event' (as defined by the Articles) is deemed to have occurred, the Articles provide guidance on landlord and tenant rights and obligations.

While the majority of jurisdictions have statutory provisions for leases lacking force majeure provisions, wise tenants and landlords will take advantage of the opportunity to define and protect their rights through carefully considering and negotiating force majeure provisions in their commercial leases.

Specific Drafting Considerations

Neither landlords nor tenants should assume that vague boilerplate force majeure provisions will adequately protect their interests in the event of a catastrophe ' even if that boilerplate is generally favorable to their side. Instead, both parties should consider whether they want or need additional protections.

For example, 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, a tenant who relied upon the minimal protections afforded in a boilerplate force majeure provision 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.

While force majeure provisions often do call for rent abatement if a catastrophic event damages the leased building or premises, they typically do not address what will happen if a catastrophic event leaves the premises undamaged but prevents a tenant from accessing it. For example, after 9/11, many tenants were unable to access their leased premises for a lengthy period of time because much of downtown Manhattan was sealed off. 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 only minimally damaged. 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.

Even when tenants and owners are permitted to return to their premises after a catastrophe, lingering effects on the community may make such return impractical. For example, parts of New Orleans still lack clean water, electricity and other services, as well as qualified employees and commercial patrons.

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-occupancy permit issues.

A fully negotiated force majeure clause should specify whether and how such events would release the tenant from its rent and other obligations, as well as whether and how they would release the landlord from its obligations to provide essential utilities and services and to repair or reconstruct the premises.

Note that these provisions may interrelate. For example, landlords may 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. The tenant, in turn, may wish to negotiate a threshold amount of rent abatement that would have to be reached before the landlord can exercise the right to terminate.

Conclusion

A carefully considered force majeure clause can protect the interests of both landlord and tenant in the aftermath of a tragedy.

Both parties should also look to other possible means (disaster plans, insurance, etc.) to protect their mutual and competing self-protection interests in the event of a catastrophe.

[Editor's Note: A&FP articles in March and April discussed how various 'boilerplate' clauses in a commercial lease may one-sidedly favor the landlord or tenant. The present article emphasizes the need to ensure that the force majeure clause in particular protects vital interests in the event of a major catastrophe. Whether your firm is a tenant or landlord, you'll want to take a close look, first at this article and then at your lease.]

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, how-ever, 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 only 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. Commercial real estate owners who suffered through the terrorist attacks of 9/11 and hurricanes Katrina and Rita learned all too well that the force majeure clauses of their leases may be the only means of ensuring invaluable protections if a catastrophic event does occur. (See, 'Post 9/11 Insurance Lessons Learned from the Ensuing Case Law,' Commercial Leasing Law & Strategy, May 2006).

Terms of the Lease Govern

Generally, a force majeure clause is intended to excuse performance by an obligated party upon the occurrence of events that are outside that party's reasonable control. A typical force majeure clause excuses a tenant from the 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 to determine how the parties have allocated the risk of casualty. For example, the Supreme Court of New York County determined that 'acts of war' in a particular lease's force majeure clause was intended by the parties to include events such as the terrorist attacks of 9/11. This force majeure clause released the landlord from its obligations under the lease, so the court held that the commercial tenant had bargained away its right to hold the landlord liable for nonperformance after the attacks. 1 World Trade Center LLC v. Cantor Fitzgerald Securities, et al., 2004 NY Slip. Op 24444.

The 1 World Trade Center ruling demonstrates that: a) courts will respect force majeure clauses, even if enforcement requires the court to discern the parties' intent from nonspecific, boilerplate terms; and b) courts are unlikely to relieve sophisticated parties from the 'benefit of their bargain' even in the wake of a horrific tragedy.

When the Lease Is Silent

If a 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, by a catastrophe.

Common law claims such as constructive eviction and the covenant of quiet enjoyment generally are not useful to a tenant seeking rent abatement after a catastrophe. Those claims were intended to provide protection against circumstances within the landlord's control, and catastrophes are by definition beyond the landlord's control.

Many jurisdictions have enacted statutes that govern the parties' rights and obligations in the event of a catastrophe. For example, for Louisiana properties affected by hurricanes Katrina and Rita, commercial leases without a force majeure provision are construed according to Louisiana Civil Code Articles 1873-1878. If a 'fortuitous event' (as defined by the Articles) is deemed to have occurred, the Articles provide guidance on landlord and tenant rights and obligations.

While the majority of jurisdictions have statutory provisions for leases lacking force majeure provisions, wise tenants and landlords will take advantage of the opportunity to define and protect their rights through carefully considering and negotiating force majeure provisions in their commercial leases.

Specific Drafting Considerations

Neither landlords nor tenants should assume that vague boilerplate force majeure provisions will adequately protect their interests in the event of a catastrophe ' even if that boilerplate is generally favorable to their side. Instead, both parties should consider whether they want or need additional protections.

For example, 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, a tenant who relied upon the minimal protections afforded in a boilerplate force majeure provision 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.

While force majeure provisions often do call for rent abatement if a catastrophic event damages the leased building or premises, they typically do not address what will happen if a catastrophic event leaves the premises undamaged but prevents a tenant from accessing it. For example, after 9/11, many tenants were unable to access their leased premises for a lengthy period of time because much of downtown Manhattan was sealed off. 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 only minimally damaged. 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.

Even when tenants and owners are permitted to return to their premises after a catastrophe, lingering effects on the community may make such return impractical. For example, parts of New Orleans still lack clean water, electricity and other services, as well as qualified employees and commercial patrons.

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-occupancy permit issues.

A fully negotiated force majeure clause should specify whether and how such events would release the tenant from its rent and other obligations, as well as whether and how they would release the landlord from its obligations to provide essential utilities and services and to repair or reconstruct the premises.

Note that these provisions may interrelate. For example, landlords may 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. The tenant, in turn, may wish to negotiate a threshold amount of rent abatement that would have to be reached before the landlord can exercise the right to terminate.

Conclusion

A carefully considered force majeure clause can protect the interests of both landlord and tenant in the aftermath of a tragedy.

Both parties should also look to other possible means (disaster plans, insurance, etc.) to protect their mutual and competing self-protection interests in the event of a catastrophe.