Force Majeure and Impossibility in the Context of Commercial Lease Obligations

March 30, 2020

Categories : Coronavirus

Types : Alerts

In the wake of coronavirus, there undoubtedly will be hundreds, if not thousands, of commercial tenants who seek relief from the provisions of their commercial leases. Whether they are successful is a function of their lease, government orders, and relief programs, if any, and what likely will be new precedent set by the courts. Will the pandemic be considered a force majeure event or otherwise excuse performance under a commercial lease based on the common law doctrine of impossibility? Parties should first look to their lease to ascertain whether it contains a force majeure clause, and, if so, what constitutes a force majeure event thereunder.

Force majeure clauses are designed to allocate the risk of specified force majeure events to each party and excuse one or both parties from performing the contract if such an event occurs. “Force majeure clauses are to be interpreted in accord with their purpose, which is to limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties. When the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.” Constellation Energy Servs. of N.Y. v. New Water St., 146 A.D.3d 557, 558 (1st Dep’t 2017)(internal citations omitted). Thus, a force majeure clause that includes an epidemic or government order may excuse performance. If, however, the lease does not include an epidemic or government order in its list of force majeure events, or anything else that might encompass coronavirus, the parties may be found to have allocated the risk to the impacted party or not at all.

Similarly, impossibility is “applied narrowly, due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances.” Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900 (1987)(internal citations omitted). Impossibility “excuses a party’s performance only when the destruction of the subject matter of the contract makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.” Id.; see also 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275 (1968). Thus, whether the global pandemic could have been foreseen and guarded against, and whether coronavirus is an act of g-d (or the politically correct modern equivalent, act of nature), undoubtedly will be key issues in the wave of litigation to come.

The pandemic also will implicate other commercial lease provisions and legal considerations involving permitted use, default provisions and conditional limitations, operating covenants, co-tenancy provisions, hell-or-high water clauses, condemnation, and constructive eviction, to name a few. These are unprecedented times. Government mandates are being issued on both the local and federal level daily. The effect and enforceability of lease provisions will need to be considered in the context of and in conjunction with these government orders, the likes of which most of us have never seen in our lifetime, and many of which have never been addressed by the courts.

Montgomery McCracken attorneys are available to assist clients with numerous issues related to COVID-19. Visit the firm’s Coronavirus (COVID-19) Resource Center for more information and updates on this constantly evolving situation. If you have any questions about your lease, please feel free to reach out to a member of our team.