A question was recently raised by a large commercial tenant as to whether the coronavirus (COVID-19) pandemic, if it forced the tenant to shutter its operations, would constitute a force majeure event such that the tenant would be excused from its monetary obligations under its lease (e.g., the obligation to pay rent and additional rent).
As a preliminary matter, force majeure provisions in commercial leases generally alleviate a tenant’s performance obligations because of an unforeseeable circumstance beyond a party’s control which causes delay, but do not generally extend and apply to a tenant’s monetary obligations. In fact, force majeure provisions commonly contain language specifically excluding monetary obligations from its purview. Thus, this question, in the first instance, requires a careful analysis of the specific lease document and the force majeure provision contained therein.
The issue of whether force majeure would exclude a tenant’s obligation to pay rent was specifically addressed in a New Jersey Appellative Division case: 476 Grand, LLC v. Dodge of Englewood, Inc., 2012 WL 670020 (N.J. Super A.D.). In brief, the tenant there sought to be excused from its obligation to pay rent by reason of certain bankruptcy proceedings that, in effect, prevented it from conducting its business as intended. The court noted that while the lease included a “broad” force majeure provision covering designated calamities and also “other causes beyond [the defaulting] party's control,” the final sentence of the provision specifically excluded the tenant’s monetary obligations under the lease. In holding for the landlord, the Appellate Division made clear that where a tenant has accepted a force majeure provision that specifically excludes rent, it has, in effect, agreed to pay rent regardless of any circumstances beyond its control. Thus, the Appellate Division explained:
Through the force majeure clause of this agreement defendant [tenant] agreed to perform its [monetary] obligation regardless of any supervening circumstance, occurrence or non-occurrence beyond its control.
In accepting an exclusion of rent from the force majeure clause, defendant [tenant] agreed to pay rent regardless of circumstances beyond its control. Courts give effect to defendants' acceptance of this absolute obligation to pay rent in accordance with the contract terms. [citations omitted] This is a risk defendant assumed under the terms of the contract. For that reason, plaintiff [landlord] was entitled to judgment as a matter of law.
The ‘take away’ here: unless the parties have agreed otherwise, a tenant will likely not be excused from its obligation to pay rent under a lease by reason of the coronavirus pandemic or other force majeure events.
If you are a party currently negotiating a lease or a purchase and sale agreement, it is highly recommended, given the current state of affairs, to take a conservative approach and consider how the coronavirus pandemic may affect your obligations to perform under that agreement. Parties should review force majeure provisions and ensure that they adequately and properly address and cover delays resulting from the coronavirus pandemic.
If you are a landlord or a tenant, and are unclear as to your rights or the other party’s rights, or have general questions on how the coronavirus pandemic may impact and affect your obligations, please contact Todd Lehder or Laurie Meyers.
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