Analysis

Use Of Pandemic Force Majeure Clause Spiked In 2020 Leases

By Andrew McIntyre
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Law360 (December 10, 2020, 5:11 PM EST) -- A third of U.S. commercial leases negotiated since March include mention of pandemic as a force majeure event — more than double what that mark had been for leases inked in 2019, according to Practical Guidance, although experts say landlords may be getting leverage elsewhere.

The data from Practical Guidance shows that while just 16% of leases in 2019 included mention of pandemic as a force majeure event, such language appears in one-third of leases signed since March.

The insights are a snapshot from Practical Guidance's ongoing survey of commercial leases, currently collecting data on non-publicly filed commercial leases for office, retail and industrial properties.

Force majeure clauses exclude a party from a certain obligation if an extreme event happens. Many have used the phrase act of God, although language varies.

Lawyers say retail landlords may be more apt than their office counterparts to grant such pandemic provisions, in part because office landlords, which are often large institutional real estate firms, have been hesitant to set a precedent on that point.

"I've seen language change in light of the pandemic to include pandemic as a force majeure event," said Steven Appelbaum, a partner at Saul Ewing Arnstein & Lehr LLP. "Sometimes the language drills down even further. … The scope of the force majeure provision matters."

Force majeure virtually overnight became the topic du jour among real estate lawyers as tenants and landlords scrambled to see what their leases said about protection in the midst of a pandemic. Since then, pandemic force majeure provisions have become major points of negotiation among landlords and tenants for new leases.

"This is obviously a point of contention between landlords and tenants," said Casey Sobhani, a partner and head of leasing for the United States at DLA Piper. "We're seeing a difference in the market between what office landlords are typically willing to agree to and what retail landlords are willing to agree to."

"In the office context, landlords have tended to hold fast. … In the retail context, there's been more of a willingness to deviate from the norm," Sobhani added.

Sobhani said he's seeing more mention of pandemic in retail leases among those that have been signed since March, but cautioned that even in new leases where a pandemic is listed as a force majeure event, it's still unlikely that clause would apply to nonpayment of rent. Prior to COVID-19 and its unprecedented closures, the widely accepted rule in the leasing context was that force majeure does not excuse nonpayment of rent, and Sobhani said that needle hasn't shifted.

Where force majeure pandemic clauses could come into play, Sobhani said, is first and foremost in the construction context.

Companies often sign leases with the expectation that the tenant will do a certain build-out of the space, and if a pandemic caused delay of such construction, a force majeure clause could then relieve the tenant of certain obligations. Every force majeure clause is worded differently, so the precise wording of the clause is key.

Taken across a larger span of time, 22% of all leases in Practical Guidance's survey, the majority of which are from 2019 and 2020, have a pandemic force majeure clause. By contrast, 35% of all leases in the survey have a force majeure provision for government-declared emergencies or government-imposed shutdowns, 24% include a provision for a new law that would render performance unlawful, and 20% have a force majeure clause for a public health crisis.

Lawyers have also been focused on what leases say about rent abatement options for tenants.

Among leases signed prior to March 2020, 41% had provisions for rent abatement if the landlord isn't able to provide services for a specified period. But in March, when the World Health Organization declared the COVID-19 a pandemic and much of the U.S. went into lockdown, 85% of leases signed that month had rent abatement provisions, according to the survey.

That shift appears to have been short-lived, though. Forty-two percent of leases signed since then have had that rent abatement provision, which is only a minor uptick from the 41% pre-pandemic level, according to the survey.

Rent abatement also continues to be a key point of discussion between landlords and tenants, particularly in states that are under eviction moratoriums. California and New York currently have eviction moratoriums, and parties in those states are seeking to solve their disagreements out of court since eviction is not currently an option.

As more courts reopen, landlords and tenants will be closely watching how courts weigh in on the question of rent abatement, and future court decisions will drive standards for drafting new leases, Appelbaum said.

And while landlords and tenants are negotiating over force majeure and rent abatement provisions, there's also the question of what sorts of termination rights tenants have. On that point, the needle may be shifting in favor of landlords since the onset of the pandemic, according to Practical Guidance's data.

For leases inked before March 2020, 33% included a right for the tenant to terminate the lease. That figure fell slightly to 31% of leases signed in March, and for leases signed since March, the mark is 24%, according to the data.

And that potential gain in leverage on the early termination question is part of a broader tug of war between landlords and tenants, as Sobhani sees it.

"The landlords are trying not to budge for COVID," Sobhani said.

--Editing by Pamela Wilkinson and John Campbell.

Law360 is owned by LexisNexis Legal & Professional, a RELX Group company, which owns Practical Guidance.


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