The COVID-19 Pandemic highlighted the importance of Force Majeure Clauses in contracts, in particular those contained in leases for commercial real estate. A force majeure event is an extreme event that arises and prevents the impacted party from performing its obligations under the lease at issue. The government mandated shutdowns that took place beginning in March of 2020 are an example of an event that may qualify as force majeure and, at least temporarily, excuse performance by the impacted party under the lease. Other types of events that may qualify as force majeure are war, strike, riots, and acts of God, to name a few.
In negotiating the force majeure provision contained in the lease, the objectives are two- fold: (1) to define those events as specifically as possible that permit the impacted party to obtain relief; and (2) define the nature of the excused performance by the impacted party. Force majeure clauses are strictly construed so, from a tenant’s standpoint, it is beneficial to make the clause as broad as possible and state specific events that will trigger the clause. With regard to the excuse of performance, a landlord will often agree to delay performance, in most cases the payment of rent, but it is very unlikely that the landlord will consent to the forgiveness or a complete abatement of the rent. As such, whether it is the landlord or tenant negotiating the force majeure provision, it is important to be clear on the precise events that will trigger the provision and the precise remedy that will be afforded the impacted party.
Due to the fact that performance, (in most cases the nonpayment of rent) will only be temporary, it is important for tenants, but landlords as well, to make sure that they are adequately insured against force majeure type events and that the contractual language of the insurance policies cover the events. While tenants will typically be the first and most directly impacted by the loss of business, the landlord can also be impacted if tenants cease operations for substantial periods or end up going out of business. As such, it is important for both the landlord and tenant to be adequately insured.
Business Interruption Insurance typically covers losses resulting from direct interruptions to business operations and may generally include lost revenue, fixed costs such as rent and utilities, and other expenses related to temporary or relocated operation. A contingent Business Interruption Insurance policy can additionally cover lost profits and indirect costs that are incurred due to impacts to third parties relied upon by the insured to conduct business. Over the course of the last 20 years, in response to smaller viral and bacterial outbreaks, the scope of insurance policies were narrowed to exclude such outbreaks from standard business interruption policies. Thus, diligence and close examination of both leases and insurance policies are critical.
As the U.S. economy reopens and both landlords and tenants negotiate new leases or renegotiate existing leases, it is more important never to focus on the specific terms of a force majeure clause as well as the specific terms and coverage of Business Interruption Insurance.
