Force majeure is an old French term that has taken on new meaning for many a property manager and office tenant in the wake of the pandemic.
Simply put, a force majeure event is a circumstance that stops someone from meeting their contractual obligation for reasons beyond their control. "Acts of God" -- including a natural disaster like a hurricane -- are a good example of what might be considered such an unforeseeable event. So are acts of man, like wars and labor strikes.
While it might seem a pandemic that causes nearly every office space in the country to become an affected party would fit that description and meet the criteria for force majeure relief, that’s not necessarily the case.
"A party’s ability to claim relief for a force majeure event … depends upon the terms of the contract, and the force majeure provision in particular. Force majeure provisions are express terms and will not ordinarily be implied into contracts governed by English law," says this post from the multinational law firm of Shearman & Sterling.
A pandemic now becomes a force majeure event
COVID-19 took the United States, including its real estate industry, by surprise, and office leases that did have force majeure clauses likely didn’t include pandemics specifically.
"Before now, most lawyers on both sides of a lease negotiation probably didn’t spend a lot of time on force majeure provisions. This has been really eye-opening," says Jonathan Weiss, who along with his partner, Rob Reichman, has negotiated thousands of leases, primarily for tenants, over the past couple of decades with New York-based Greenspoon Marder.
Now, Weiss, Reichman, and other attorneys across the land are, of course, trying to include such relief in their new contracts, while they and others are hashing out what relief can be extracted for each affected party from the force majeure provision in existing contracts.
Paying rent nearly never excused
Force majeure clauses in leases typically include contractual remedy for failure to meet performance obligations, such as construction completed to allow timely move-in or failure to move out on time when the lease is up, but they almost never relieve the tenant from paying rent, Reichman and Weiss say.
That’s a precedent of applicable law that’s being challenged now in courts, including in two closely watched cases in Chicago and New York City.
In the former, the law firm Jenner & Block has been sued for more than $3.8 million in unpaid rent by its landlord, an affiliate of investment manager Heitman in Chicago.
According to a May 29 article in the Chicago Tribune, the law firm says the lease on the 416,000 square feet it uses to house 330 lawyers and staff in a 46-story riverfront tower includes a contract provision for rent abatement in such an unforeseeable circumstance.
In the New York City case, the law firm of Simpson Thacher & Bartlett says in a suit it filed against the corporate entity VBGO 425 Lexington LLC that the landlord ignored provisions in its lease. The tenant here is seeking $8 million in rent abatement and other compensation.
According to a July 29 article by Law360.com, that lease had a provision for force majeure events, which covers major events such as fires, strikes, and "governmental preemption" due to "public emergency." The complaint said the tenant is entitled to rent abatement if forced to vacate a significant portion of the space for 60 consecutive days or more.
Reichman, the Greenspoon Marder leasing attorney, said that while precedent will be set by these and other cases to come, “one thing I learned as a litigator is that the judge is going to look at the specific language in the contract. This is not common law. This is all based on contract law.”
How to obtain relief under a force majeure event
First, review your contract for a force majeure clause. If you have one, then be prepared to prove that your company’s inability to meet your contractual obligations is a direct result of that event.
To reiterate, according to the National Law Review, courts have generally interpreted force majeure clauses to include only those events actually listed in the clause, not every unforeseeable circumstance in general.
But even if pandemics aren’t listed, there is the potential that an act of God or a government closure could be ruled a force majeure event, and the court could then allow the tenant to avoid paying rent for the time if using its leased space became an impracticability or even impossibility.
How to negotiate the scope of the relief
Reichman and Weiss say the scope of the relief has been the most contested part of the emerging new normal in negotiating leases.
Rent abatement and deferral and lease extensions in exchange for that contractual language are now part of what the law partners have included in a "model lease clause" they’ve created as an example of a pandemic rent relief provision for lease negotiations going forward.
The seven key protections below are excerpted from an article Reichman wrote for the Commercial Lease Law Insider.
1. Defined Trigger Event
The COVID-19 pandemic is used as a pattern for creating an example of a clear and specific definition of a triggering event, in this case a public health closure (PHC).
2. Minimum Disruption Period Before Relief
Specify the minimum number days the PHC must last for relief to kick in.
3. Scope of Rent Relief
Limit the relief to fixed rent.
4. Rent Abatement
The abatement piece starts on day 11 of the shutdown. There are two suggested caps. One is an annual abatement cap of 90 days; the other is an aggregate term abatement cap of 180 days.
5. Offsetting Lease Extension
Tie the extension length to the abated amount of fixed rent. Reichman uses this formula: days of extension = total fixed rent abated ÷ per diem amount of fixed rent payable during lease in final year rounded up to the nearest whole number.
6. Rent Deferral
"To get a tenant to accept rent abatement caps, you might have to compromise and provide that when and if the amount of fixed rent abatements exceed either of the abatement caps, the fixed rent due gets deferred until the PHC ends," Reichman says. The model clause suggests a total of 90 days in any 12-month period and 180 total days over the entire lease term.
7. Deferral Repayment Schedule
The tenant agrees to repay deferred rent, interest free, in 60 equal and consecutive monthly installments, starting in the 12th full calendar month after the PHC ends. Or pay the whole balance by the time the lease expires, if that’s less than 60 months.
Leverage is what matters while the dynamic changes
"Like anything else, when you negotiate a contract for a lease, leverage is what matters," Weiss says. "A small tenant is probably not going to have much with a large landlord and vice versa."
Indeed, the larger party may well be in a position to simply walk away from a deal and find someone else who will meet its desired terms.
But every situation is different, and commercial real estate investors and occupants alike should keep abreast of how the pandemic will be changing the dynamics of that relationship now and going forward for years to come.