Force majeure clauses typically excuse performance of one party when events that are outside of the control of the performing party occur, either delaying performance or excusing it altogether. If the lease contains a force majeure clause, the types of events described may include casualty events like fire, explosion, severe weather events (although the damage/casualty provision will usually control), strikes, labor shortages, equipment or material shortages, rationing, interruptions in services (utilities, transportation), court actions, “acts of God”, act of war, or any other cause that is beyond the control of the party seeking excuse. In some instances, the lease may even include specific reference to disease, epidemics or pandemics. However, it should be noted that force majeure provisions often do not permit a tenant to avoid its rent obligations despite the occurrence of a force majeure event. Again, it is necessary to review the specific force majeure and other lease provisions in each instance to determine how the risks were allocated between the landlord and tenant.
Frustration of Purpose; Commercial Impracticability or Impossibility of Performance.
Colorado and many other states recognize the concepts of “frustration of purpose,” “commercial impracticability” and “impossibility of performance” as defenses in a breach of contract action. These defenses may be applicable to excuse performance in the event there is no force majeure provision in a lease. Courts will enforce a force majeure provision in a lease to the extent one exists. If there is no force majeure provision or there is one, but it can’t be construed to encompass a pandemic, then the common law defenses noted above may be applicable to excuse performance under a lease.
Relying on frustration of purpose in order to avoid performance, the party seeking to avoid the obligations must show total, or near total, destruction of the essential purpose of the transaction. This requires showing that the level of frustration is so extreme that it was not a risk that the party would have assumed under the contract.
Impossibility can also mean impracticability due to extreme and unreasonable expense or difficulty. It need not mean absolute impossibility. However, it also contemplates unanticipated circumstances that have made performance fundamentally different from what would have been reasonably contemplated at the time the parties entered into the contract. Extreme or unreasonable difficulty, expense, injury or loss may be involved as compared to mere difficulty, expense or hardship incurred in performing.
Other factors, such as whether the force majeure event is temporary or permanent, and whether or not performance is objectively possible will also factor into the analysis. Generally, courts will not excuse performance under the foregoing common law doctrines solely because the lease has become economically less beneficial than anticipated due to market fluctuations. On the other hand, a stronger case may be presented where a landlord can no longer make the premises available, and a tenant can no longer operate in the premises – a fundamental purpose of the lease – due to a governmental order arising out of the pandemic.
Other Lease Impacts.
It is not just the payment of rent that may be at issue in the landlord-tenant setting. Other issues may arise related to completion of improvement work and delivery of the space considering labor constraints, diminished material supplies, governmental office closures, and resulting delays in permitting and inspections.
A lease may contain specific language pertaining to rent abatement as a result of certain events, including loss of access to or loss of services to the premises.
Landlords and tenants should look to their business interruption insurance as another potential source of relief. Rudy Verner, a partner at BHGR, has posted an article on our firm blog regarding business interruption insurance, which may be found here:https://bhgrlaw.com/2020/03/19/does-your-business-interruption-insurance-cover-covid-19/
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