Force Majeure and the Doctrine of Impossibility

Example #1

In the event that the Landlord or the Tenant will be unable to fulfill, or shall be delayed or prevented from the fulfillment of, any obligation in this Lease by reason of municipal delays in providing necessary approvals or permits, the other party's delay in providing approvals as required in this Lease, strikes, third party lockouts, fire, flood, earthquake, lightning, storm, acts of God, war, riots, insurrections or other reasons of like nature beyond the reasonable control of the party delayed or prevented from fulfilling any obligation in this Lease (excepting any delay or prevention from such fulfillment caused by a lack of funds or other financial reasons) and provided that such party uses all reasonable diligence to overcome such unavoidable delay, then the time period for performance of such an obligation will be extended for a period equivalent to the duration of such unavoidable delay. Municipal delays in providing necessary approvals or permits, the other party's delay in providing approvals as required in this Lease, strikes, third party lockouts, fire, flood, earthquake, lightning, storm, acts of God, war, riots, insurrections or other reasons of like nature beyond the reasonable control of the party delayed or prevented from fulfilling any obligation in this Lease (excepting any delay or prevention from such fulfillment caused by a lack of funds or other financial reasons) and provided that such party uses all reasonable diligence to overcome such unavoidable delay, then the time period for performance of such an obligation will be extended for a period equivalent to the duration of such unavoidable delay

Example #2

Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease (collectively, a "Force Majeure Event"), notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party's performance caused by a Force Majeure Event. Either party shall provide prompt notice of any Force Majeure Event to the other party herein.

As you can see, a pandemic is not expressly included in either of the sample provisions even in these longer provisions, and only the second example expressly carves out rent as an obligation that is forgiven. That said, more likely than not, the force majeure provisions in a sophisticated lease will expressly exclude rental obligations from the types of obligations for which a tenant can be excused because of truly unforeseen events outside of their control.

It is critical to closely review the language, but local state courts typically enforce the clear and unambiguous terms of a contract. And note that the courts will place the burden of establishing the conditions of force majeure on the party raising the provision to excuse an otherwise required obligation. Therefore, as a matter of a law, the exclusion of rent from the force majeure clause if it is expressly included in such a provision may effectively prevent the tenant from avoiding that obligation under the lease.

Doctrine of Impossibility

Most leases will contain a force majeure clause somewhere in the boilerplate, but for agreements that do not contain such a clause (and arguably, as will be discussed below, even with leases that have such a clause), the tenant might instead raise the doctrine of impossibility. Depending on the specific law of the applicable state, the party relying on the defense must typically establish: 1) the unexpected occurrence of an intervening act; 2) such occurrence was of such a character that its non-occurrence was a basic assumption of the agreement of the parties; and 3) that occurrence made performance impracticable. A critical factor is whether the party agreed in the lease to assume the risk of performance, whether possible or not.

For example, a restaurant or bar tenant with a narrowly defined permitted use clause might have a strong argument to use the doctrine of impossibility if their business was shut down by order of the governor. The defense if successful would act to excuse performance by the party if an event occurs whose non-occurrence was a basic assumption of the agreement and if it makes performance impossible or impractical. The precise language in the lease is critically important as well as the circumstances of why the tenant could not operate.

Normally the courts will defer to the language in the agreement and a force majeure clause will control over this doctrine of impossibility. So if the language of the lease effectively requires that the tenant accept the risk of paying rent even in the time of a force majeure event, a court might hold that the tenant accepted the risk of paying rent even when an impossibility event occurred. Though the landlord's argument likely becomes more difficult when the government rules that the only use permitted under the lease is no longer allowed. Note further, however, that there is case law where the doctrine of impossibility trumps the force majeure clause, but this is usually in the context of a contract for commercial goods. Given the unprecedented nature of this pandemic and the resulting closures, it is not difficult to see courts taking creative approaches so landlords and tenants need to be prepared for all arguments.

Once we are past the current crisis, it would be prudent for all parties to update their form leases to expressly include pandemics and epidemics as force majeure events, make clear whether the obligation to pay rent is excused or not, and require the parties to deliver notice of force majeure within a certain period of days after the start of the delay period.

*****

John G. Kelly is a partner with Bean Kinney & Korman PC and a member of Business Crime Bulletin's LJN sibling Commercial Leasing Law & Strategy's Board of Editors. His practice focuses on commercial leasing and he represents national landlords and tenants. Please contact him at [email protected] should you have any questions or need assistance.