How Easy Will it Be for Retailers to Shed Leases?
The question above has been posed several times to Trepp over the past week from investors to regulators to business reporters. Trepp asked the law firm Massey & Gail, which has offices in Chicago and D.C., to opine. Here’s what Massey & Gail had to say*:
Can a tenant legally use the virus to delay its rent payments or otherwise avoid making timely payments altogether?
The answer depends upon the specific language of the lease as well as the particular circumstances involved. Many commercial leases and contracts contain
force majeure
—
or “Act of God”—clauses while others do not. Many
force majeure
clauses do not expressly address epidemics or pandemics. In general, little legal precedent specifically addresses the rights of contractual parties to avoid their legal obligations during epidemics.
If the lease contains a “force majeure” provision covering epidemics, does the tenant win?
Not necessarily. Even when a contract contains a
force majeure
clause governing epidemics, the party invoking it must typically show that it cannot perform because of factors beyond its reasonable control. Economic downturns and fluctuations in revenue typically don’t trigger
force majeure
clauses. But government-imposed quarantines or shelter-in-place orders that close shopping malls or office complexes present a more compelling case
.
Moreover, once such a clause is triggered, the party claiming its protection ordinarily must show that it used commercially reasonable efforts to mitigate and resolve the unfavorable consequences. And that party usually must provide prompt notice to its counterparty as well as periodic reports throughout the period during which it contends it cannot perform. Parties should closely examine their contracts for compliance with these requirements.
What if the contract lacks a specific “force majeure” clause?
Without such a provision, a tenant may argue that the coronavirus has made performance “impossible” or has “frustrated” the contract’s purpose. But those are high legal standards to satisfy. Usually, courts exhibit reluctance when considering such a request to relieve a party of its agreed obligations.
Among other things, the event must render the
entire purpose
of the contract untenable, rendering it valueless to one party. That is why an economic downturn—even one caused by the coronavirus—may likely not apply.
Should a prudent property owner take steps in this environment to reduce a counterparty’s ability to avoid its obligations by claiming force majeure?
Yes. We advise clients about how they can communicate with counterparties to reach mutually beneficial solutions while preserving their legal rights, including their ability to recoup lost future payments. Property owners should consider possible insurance coverage, including business interruption insurance. And, of course, federal, state, or local actions and guidelines, including the recent CARES Act, may support relief.
*O
pinions expressed are those of Massey & Gail and not necessarily those of THG.
