COVID-19 and Commercial Tenancies

Often included in commercial leases is what is legally known as a force majeure clause. A force majeure clause becomes legally significant when a commercial tenant is unable to perform its contractual obligations under the lease because of circumstances beyond the tenant’s control, such as fire, flood, war, or acts of God, and seeks to be excused from the lease and its obligations thereunder. Significant now is the fact that the state is shutting down many businesses as a result of COVID-19. Force majeure clauses will become of critical importance in the upcoming immediate months and the matter of litigation for at least the next decade.

The courts in New York have generally have held that the scope of a force majeure clause, and thus whether a tenant’s obligations under the lease may be excused, is dependent upon its express terms. As such, whether or not a commercial tenant may be excused from its lease obligations depends upon the specific language of the force majeure clause in the tenant’s lease.

Force majeure clauses typically enumerate the specific events which excuse the tenant’s performance. Under New York law, the courts have strictly construed force majeure clauses so that only the specifically enumerated events may excuse the tenant’s performance. At issue is what enumerated event in a force majeure clause may likely be interpreted by the courts to include the COVID-19 pandemic. Clearly, if the clause includes public health-related language, such as “flu, epidemic, disease outbreak”, the COVID-19 pandemic will be included. However, the clause “acts of government” may also be significant here and constitute an excusable force majeure event given the many government directives ordering the closing of business establishments such as restaurants, bars and gyms all in an effort to reduce population density and “flatten the curve”. Typical commercial leases in New York contain an “acts of government” force majeure language, especially post 9-11.

Finally, some force majeure clauses contain a catch-all provision such as “or other similar causes beyond the control of such party”. The courts in New York law have interpreted such a catch- all phrase narrowly and to mean only events similar to those specifically enumerated in the lease are included.

If the lease does not contain a force majeure clause, or it contains a clause that cannot be interpreted to cover the Covid-19 pandemic, a tenant may nevertheless be able to utilize the legal doctrine of “impossibility”. “Impossibility” is however a defense that the tenant would raise to an action or proceeding commenced by the landlord alleging breach of the lease. The defense of “impossibility” means that performance by the tenant must be made impossible by an unanticipated event that could not have been foreseen or specifically protected against in the lease. While COVID-19 may be interpreted by the courts to be an unanticipated and unforeseen event, the defense of “impossibility” is applicable only if the lease is truly impossible to perform. A tenant’s obligations under the lease is not excused if the lease is simply more financially difficult to perform.

One thing is certain, the litigation in New York that will ensue involving, among many other things, commercial tenancies once the health crisis finally abates will be litigated for decades, even more so than the thousands of cases involving Hurricane Sandy.

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