May 14, 2020 – The force majeure (French for “superior force”) clause has elevated into the “trending” category among real estate professionals and has emerged as an often-discussed leverage tool to help businesses escape from contractual obligations. By definition, the clause is included in legal documents to offer protection to parties that cannot perform services resulting from an unforeseen event beyond their control. Examples of these events commonly cited are wars, disasters caused by weather, terrorism or actions by the government. The clause bubbled to the surface following the 9/11 disaster.
According to Michele Cohen, Principal at Miles & Stockbridge and a member of the NAIOP-MD Legislative Committee, she is finding “willingness among real estate owners and tenants to find workable solutions to the current situation,” but believes “the clause will be more heavily negotiated in future legal documents as the result of these recent experiences.”
“The pandemic is a black swan event and it remains to be seen whether courts follow a strict interpretation of the contract language applicable to force majeure claims in the context of the real estate industry,” Cohen explained. “From my dealings with properties throughout the country, I am detecting conciliatory attitudes from both sides and, of course, it is not in the best interest of landlords to evict tenants from its properties. Because force majeure is receiving a lot of attention currently, combined with the existing uncertainty in the real estate sector, I fully expect to see the clause more carefully reviewed and negotiated in future contract documents. In the past, many viewed force majeure clauses as a minor detail and seldom a deal-breaker. I feel certain this will change.”
For landlords and tenants that currently have this clause written into its leases, Cohen offers this advice. “Read the contract carefully to understand what events and which parties may be covered, and any exclusions to coverage, including whether the rent or other financial obligations must continue to be paid,” Cohen said. “Speak with legal counsel for specific guidance on whether your force majeure clause applies or whether there are other legal theories supporting a right to claim justification for non-performance.”
According to an article appearing in The National Law Review in March, events such as “pandemics, diseases or public health emergencies … have not commonly been included in force majeure provisions in the past. Even if COVID-19 qualifies as a force majeure event under the applicable lease, a tenant’s performance may not be excused unless it is objectively impossible or commercially unreasonable to perform.”
“We have already seen a fundamental change in the way attorneys treat the force majeure clause in legal documents,” said Jennifer Zohorsky, Partner at Rosenberg Martin Greenberg. “Prior to COVID-19, the force majeure provision was less scrutinized by the legal community but now, it has been prioritized to the first item examined. From my recent experiences, the issue has not come into play as companies have been extremely reasonable with their negotiations as few had the words pandemic or quarantine written into contracts. Moving forward, I fully expect the clause and its concept to be intensely scrutinized and expanded within leases and contracts particularly as it relates to the payment of rent and the ability to close a deal. From a landlord point of view, the force majeure clause will be expanded to include a declaration of emergency and mandatory closures for a global or national pandemic when it comes to the ability of the tenant to perform, but it will not ultimately excuse the payment of rent,” she added.