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Taft Law:
The “Stay at Home” Order and Performance under a Lease or Mortgage
Following Indiana Governor Eric Holcomb’s March 23 “Stay at Home” order, tenants, landlords, and lenders have been scrambling to review what rights, remedies, and obligations they have under their respective real estate documents.
As part of their review, most tenants are likely asking themselves the following, “Am I still obligated to operate under my lease if my business operations have been severely limited by government order due to the COVID-19 pandemic; and regardless, am I still obligated to pay full rent to the Landlord, even though my space has been partially or completely closed due to the COVID-19 pandemic?”
Similarly, most landlords are wondering, “What rights do I have to collect rents if my tenants cannot fully operate from their leased premises, and if I cannot collect rent from the tenants, do I remain obligated to make my mortgage payment?”
As a preliminary matter, leases, mortgages, and other real estate documents are interpreted in the same way as any other contract under Indiana law. Therefore, standard contract law rules of construction and interpretation shall apply to the interpretation of leases and mortgages. More on mortgages later.
Regarding leases, a tenant who wants to terminate its lease due to the COVID-19 pandemic should look for an express right to terminate ( “Termination Rights”) or, if none, an express right to offset, withhold, or abate rent (“Offset Rights”) due to Tenant’s inability to access, use, and/or operate its leased premises pursuant to the lease.
Termination Rights are unlikely to be found in most leases unless the parties originally contemplated the leasehold to be short-term despite a longer stated expiration date. Conversely, landlords will be quick to point out that most Offset Rights, even if they exist in a lease, are of limited applicability and only apply in the event the specific lack of access, use, and/or inability to operate is caused by landlord’s negligence or intentional misconduct.
Assuming that most (if not all) of a tenant’s inability to perform is due to governmental order, and not the negligence or intentional conduct of the landlord, then typical Offset Rights in a lease likely are inapplicable for the majority of tenants in connection with the “Stay at Home” order.
Tenants also should also review any force majeure provision(s) in the tenant’s lease. The phrase “force majeure” is French for “a superior force” as defined in Black’s Law Dictionary. A force majeure clause is defined as, “a contractual provision allocating the risk if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled."
However, the scope and effect of a ‘force majeure’ clause depends on the specific contract language, and not on any traditional definition of the term. In other words, when the parties have defined the nature of force majeure in their agreement, that definition dictates the application, effect, and scope of force majeure with regard to that agreement and those parties.
Therefore, if a force majeure provision exists in a lease, then the express terms of that provision, such as the inclusion of specific events of force majeure, such as acts of God, governmental orders, strikes, change in economic conditions, etc., will heavily impact whether or not the subject event (here, the inability to perform due to the COVID-19 pandemic) qualifies as a force majeure event.
While force majeure provisions could arguably excuse any obligation of Tenant to be open and operating from the leased premises during a governmental closure order or the “Stay at Home” order, these same provisions may not excuse the tenant’s obligation to pay rent due a financial hardship associated with few/no patrons to the store. Notwithstanding the analysis above, and very importantly, most landlords include within their standard force majeure clauses a caveat that even if a force majeure event occurs, it does not excuse tenant’s ongoing obligations to pay rent.
Alternatively, with regard to leases or mortgages without a force majeure clause (most mortgages do not include a force majeure clause), a party may be excused from performance of contractual obligations if the performance has become impracticable or impossible by the occurrence of a supervening event where (1) an unexpected contingency occurs, (2) the risk of which was not allocated either by agreement or custom, (3) the occurrence of the contingency has made performance impossible. Therefore, the same elements of force majeure requiring unforeseeability and more than a financial hardship apply here as well. As a result, landlords will find it difficult to be excused from making its mortgage payments, and a tenant’s obligation to pay rent likely will not be excused solely as a result of the “Stay at Home” order.
Tenants and landlords are also advised to examine their leases or mortgages for any notice requirements to avoid any arguments by the opposing party that any rights and remedies therein have been waived. Remember that the COVID-19 pandemic remains an evolving situation and litigation may be likely in the future regarding the legal concepts identified in this article; therefore, nothing above is a substitute for thorough and competent legal representation.
