Now that the COVID-19 crisis has paralyzed the economy, Riley Riper Hollin & Colagreco and other law firms are getting inquiries from commercial landlords and tenants regarding leasehold obligations. Below are some initial considerations.
1. Does the lease have a force majeure clause?
Under any scenario you must first look to the terms and provisions of your lease agreement. Many leases include a force majeure or “force of nature” clause which may be invoked to excuse performance. A force majeure clause is a provision by which the parties agree to excuse performance if, because of an unforeseen, external event beyond their control, at least one of the parties can no longer perform. While most leases will not have listed COVID-19 specifically, the lease might list pandemic, epidemic or national or regional emergency, or other events caused by COVID-19, such as labor stoppage, government actions, laws or orders, or travel bans. The application of any force majeure clause to the impact of COVID-19 will be driven by the terms and conditions of the lease and the nature and facts underlying the nonperformance. If you are the landlord and your tenant raises the COVID-19 national emergency so as to invoke a force majeure clause, you can assume that courts across the Commonwealth will be sympathetic to such a position.
2. No force majeure clause?
If your lease does not include a force majeure clause, performance may nonetheless be excused. The term “Impracticability of Performance” is often used as a broad title for three related doctrines: impossibility, impracticability, and frustration of purpose. When parties enter into a lease that is dependent for its performance on the continual availability of a specific thing, and that availability comes to an end by reason of circumstances beyond the control of the parties, the lease may be regarded as dissolved. Government action has been held to constitute legitimate grounds to support nonperformance based on impracticability. Given government actions in response to COVID-19, including orders restricting travel, gathering in groups or conducting certain businesses, parties might argue that they can no longer perform the obligations under their lease.
3. Does the current economic downturn caused by the COVID-19 crisis excuse non-performance?
Market fluctuations do not usually render performance commercially impracticable. Impracticability applies only if an unforeseen event occurs and the non-occurrence of that event was a basic assumption of the lease. The expectation that current market conditions will continue for the life of the lease is not such a basic assumption. Likewise, the simple fact that a lease has become economically challenging for one of the parties is generally insufficient to establish impracticability. Even relatively drastic changes in the market have been held insufficient to trigger the impracticability defense. The viability of this argument in the context of the COVID-19 crisis will depend in large part on the duration and extent of the current downturn.
4. Other Considerations
Whether you are a landlord or a tenant it is important to know the terms of your lease and to follow the notice provisions set out in the lease. Moreover, in reacting to circumstances caused by the COVID-19 crisis, be mindful not to waive any rights under the lease in the event litigation does ensue. If you are a landlord, take consistent positions from one tenant to the other. You should expect tenants to communicate among themselves and it will be to the landlord’s benefit to develop and implement a uniform approach.
If you have questions or if you would like to review issues related to the COVID-19 crisis, please contact one of our litigation partners, Edward J. Greene, Jane Richardson or Michael T. Shiring at (610) 458-4400 for more information.