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Law360 (August 28, 2020, 6:02 PM EDT) --
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| Perrie Weiner |
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| Aaron Goodman |
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| Ben Turner |
Force majeure provisions typically enumerate a parade of horribles — those events that are, by their nature, unforeseeable and that the parties agree will excuse or delay performance under the contract. Force majeure provisions can be triggered by myriad events such as civil unrest, acts of god, natural disasters, terrorist activities, governmental actions or orders, labor strikes, war, acts of war, war-like times and depositions (i.e., the removal of a king, monarch, president or other head of state).
In addition, some modern provisions list epidemics or even pandemics as triggering events. The unique nature of force majeure, as seen from the laundry list of extraordinary triggering events, is that these occurrences are far and beyond the control of the parties, such that no party should be penalized for failing to perform under the contract.
Courts tend to construe force majeure clauses narrowly, and "will generally only excuse a non-party's performance if the event that caused the party's nonperformance is specifically identified."[1] That said, some provisions contain catch-all language, which gives the court greater latitude in interpreting force majeure to apply in the context of unenumerated events.
As long as the event is enumerated, its occurrence will trigger the provision's effect, regardless of foreseeability. And even when an enumerated event occurs, force majeure provisions are rife with legal issues subject to argument amongst the parties. Disputes generally arise over the interpretation of the clause, including whether the tenant's ability or inability to pay affects the clause, the meaning of the enumerated provisions (e.g., what is an act of god?), and the extent to which catch-all language will cover events not specifically enumerated.
A growing docketing of lease litigation around the country asks the judiciary to answer these and many other questions. Although cases often settle before the court has the chance to rule, the claims asserted and mechanisms for relief cited are instructive as to the current legal thinking and likely evolution of commercial landlord / tenant law and contract law in general.
In re: Hitz Restaurant Group
What is governmental action?
Many force majeure provisions enumerate governmental action or inaction, orders of government and/or regulation of government as triggering events. The central question in this situation becomes: what is considered a governmental regulation, order or action?
This question was addressed in In re: Hitz Restaurant Group, a recent Illinois decision where the U.S. District Court for the Northern District of Illinois found that the restaurant tenant successfully invoked the "governmental action or inaction, orders of the government" phrase of the lease's force majeure clause in arguing that its obligation to pay rent was partially excused by the Illinois governor's order prohibiting consumption of food or beverages on the premises of all restaurants.[2]
Authority is scarce regarding the extent to which government actions may trigger force majeure clauses. Hitz and at least one other court have required that the party listing government action as a force majeure event specify the degree to which the government action impacts the party's performance.[3]
The Hitz court held that the tenant's obligation to pay rent was only partially excused because the governor's order did not prohibit tenant "from performing carry-out, curbside pick-up, and delivery services." In Seaboard Lumber Co. v. United States, the U.S. Court of Appeals for the Federal Circuit took a similar approach and, as one of the few cases on the issue, will likely be the focus of significant analysis by litigants and courts in COVID-19-related force majeure disputes.
Seaboard involved two lumber companies' joint appeal of Court of Federal Claims decisions awarding damages to the government for the companies' nonperformance on timber contracts. The force majeure clause in Seaboard stated that contractors qualified for contract term adjustments where they experienced delays greater than ten days as a result of, among other things, "acts of government."[4]
The lumber company argued that governmental fiscal and monetary positions taken in the early 1980s increased interest rates and caused a decline in the timber market that prevented performance.
The Federal Circuit rejected the argument, concluding that the government acts had "only an attenuated effect on the contracts at issue" and, at best, made the contracts unprofitable, not impossible. The court drew on two federal courts of appeals decisions to arrive at its holding.
In the first, Langham-Hill Petroleum Inc. v. S. Fuels Co., the U.S. Court of Appeals for the Fourth Circuit rejected a force majeure argument based on unprofitability arising from a collapse in oil prices.
In the second, Northern Indiana Public Service Company v. Carbon County Coal Co., the U.S. Court of Appeals for the Seventh Circuit held that a government order prohibiting a company from passing the cost of increased coal prices to consumers did not excuse the company from an unprofitable contract. The Seventh Circuit explained that a "force majeure clause is not intended to buffer a party against the normal risks of a contract."[5]
Parties must also consider the timing and effect of force majeure application. In Hitz, the court found that tenant's March lease payment, which became fully due before the governor's shutdown order, was not excused under the force majeure provision. In that case, the provision specified that parties "shall be excused from performing … obligations" in the case of a force majeure event.
Some provisions render the obligations excused or terminated, but others only permit the obligations to be delayed. Landlords and tenants must pay close attention to the specific language of their commercial lease to determine what successful invocation of their lease' force majeure provision looks like.
In the context of COVID-19, government orders shutting down or limiting businesses are likely to satisfy even the most stringent force majeure standards. As in Hitz, operation of the business is impossible, not merely unprofitable, based on the government orders.
However, the COVID-19 pandemic by itself may not suffice to establish impossibility. If the business is still permitted to operate and generate revenue for rent, and the impact from the COVID-19 pandemic is more attenuated as simply a macroeconomic event that reduces the business's profitability and demand for its products, performance is not impossible.
In contrast, if the standard were lower, like "commercially impractical," parties may be able to argue that the dangers and extreme disruptions of COVID-19 excused performance.
Gomel Capital Partners LLC v. 601 NE 29 Drive LLC et al.
What is an "act of God"?
A party seeking relief under force majeure could potentially argue that COVID-19 is an act of God covered under the provision. The difficulty with this argument is the uncertainty around the interpretation of "act of God." Indeed, this poses the open question — are pandemics "acts of God" for the purposes of force majeure relief?
With no specific guidance on pandemics, parties can look to other interpretations of "act of God" in assessing the inquiry. Some courts have interpreted it to mean "intervention of such an extraordinary, violent and destructive agent, as by its very nature raises a presumption that no human means could resist its effect."[6]
Indeed, U.S. courts have battled with this question for more than a century. In Gleeson v. Virginia Midland Railroad Co., a decision written by the U.S. Supreme Court in 1891, the court explains that "[e]xtraordinary floods, storms of unusual violence, sudden tempests, severe frosts, great droughts, lightnings, earthquakes, sudden deaths and illnesses," have each "been held to be 'acts of God.'"[7]
Similarly, other courts will only consider an act of God as a force majeure event when it is so extraordinary and unprecedented that human foresight could not anticipate or guard against it.[8] The general trend requires an unprecedented act that humans cannot guard against. Sound familiar?
While it appears no court has yet definitively opined on whether the COVID-19 pandemic is considered an act of God,[9] that is likely to change in short order. Numerous parties have presented the argument in lease and other real estate disputes arising out of the pandemic.
More recently, in a complaint filed by Gomel Capital Partners in the U.S. District Court for the Eastern District of New York, the plaintiff sought to terminate their real property purchase and recover their deposit, citing the "outbreak of the COVID-19 global pandemic" as "a force majeure event," and "a quintessential 'act of God.'"
The plaintiff argued that the pandemic and corresponding stay-at-home orders made it impossible for them to perform certain contract obligations. While the parties in Gomel settled, the question stands and many parties and courts are vying to answer.
Simpson Thacher Bartlett LLP v. VBGO 425 Lexington LLC
While it is uncommon and largely depends on the relative negotiating power of the parties, some leases actually call-out rent abatement as a force majeure remedy. The law firm Simpson Thacher Bartlett recently filed a complaint in New York state court, alleging that its lease agreement specifically included rent abatement for force majeure events.
The lease explicitly identifies "governmental preemption of priorities or other controls in connection with a national or other public emergency" as a force majeure trigger. The lease further defines force majeure to broadly include "any other cause, whether similar or dissimilar." As a result, Simpson Thatcher seeks $8 million in rent abatement from their New York landlord.
The firm argues that they were ordered by government mandates to vacate their offices and were unable to continue the reasonable operation of their business for a period of over 60 days, which under the terms of the lease entitles them to rent abatement.
Hart 353 North Clark LLC v. Jenner & Block LLP
In another rent abatement case pending in Illinois' Circuit Court of Cook County, law firm tenant Jenner & Block invoked a force majeure defense against its Chicago landlord's complaint, which alleges that the firm owes more than $3.7 million in back-rent.
Jenner & Block alleges in their answer that the lease contains "clear and explicit, hard negotiated rent abatement provisions which required Landlord to reduce Jenner & Block's rent" in any event, including force majeure, where the firm "reasonably determines that at least 20% of its space 'cannot be … used and occupied as intended.'"
The firm also alleges that they made the "reasonable determination that due to the significant health dangers and consequences of the COVID-19 pandemic … [they had] not used at least 89% of its space." This case remains pending and the outcome will be instructive.
How the Tenant's Ability or Inability to Pay Rent Might Affect the Force Majeure Defense
In a standard force majeure clause in a commercial lease, it is often the case that the tenant's inability to pay or lack of funds is expressly excluded from the list of events excusing tenant's rent obligation. Thus, in the face of a seemingly applicable force majeure provision, one legal tactic landlords often pursue is attempting to reframe the proximate cause of tenant's failure to perform as inability to pay, rather than an act of God or government act.
A recent example of this may be found in Hitz, where the lease specified that "lack of money shall not be grounds for Force Majeure." As expected, the landlord tried to characterize tenant's failure to pay rent as merely arising from a lack of money. The court rejected this argument, clarifying that the governor's shutdown order, rather than "lack of money," was "the proximate cause of [tenant's] inability to generate revenue and pay rent."
Accordingly, the court reduced the tenant's rent obligation in proportion to its reduced ability to generate revenue due to the executive order. The court focused on tenant's inability to generate revenue rather than their financial inability to pay rent.
Nonetheless, a landlord might alternatively argue that if the tenant still has the ability to pay, the force majeure provision cannot be triggered. In Gillespie v. Simpson, the landlord entered a 10-year lease with tenants to for the development and production of geothermal products on state land. After executing the lease, the government failed to issue permits for geothermal wells and, after two years of paying rent, tenants invoked the force majeure clause.
The clause broadly defined force majeure events to include "action by the federal or state government regulating or interfering in any way with" tenants' rights to use the land. The landlord argued that because the tenants had already paid rent for two years despite the land being of no use, tenants "obviously had the ability to pay," and therefore, the force majeure clause could not be triggered.
The court rejected that argument, noting that under the plain terms of the lease, ability to pay was irrelevant. Instead, because the lease specifically defined force majeure as any action by the state which interfered with tenants' rights, the obligation to pay rent was plainly suspended.[10] Tenants faced with such arguments should there for direct the court back to the language of the force majeure clause.
Few, if any such clauses, qualify a force majeure effect based on the tenant's ability or inability to pay. But more broadly, even apart from the specific language in a lease agreement, many courts hold that financial hardship does not suffice to warrant relief under a force majeure clause.[11]
Thus, while ability to pay may be irrelevant, so is an economic downturn. The force majeure event itself — not the resulting economic hardship — must be the proximate cause of the tenant's inability to perform.
Framing the Force Majeure Argument
Commercial tenants should anticipate that landlords are likely to characterize tenants' efforts to invoke force majeure provisions in terms of run-of-the mill, foreseeable economic hardship, the risk for which tenants accepted when they signed their leases.
Under landlords' arguments, tenants are simply exploiting the economic downturn as an excuse to evade their rent obligations, but a mere decline in market demand does not suffice to trigger a force majeure clause. To counter such arguments, tenants should avoid focusing on profitability, inability to pay and the economic impact of a global recession.
Instead, tenants should tie their force majeure defense to specific, government-mandated business closures and orders to vacate their premises. And while few pre-COVID-19 force majeure provisions will have specifically enumerated a deadly global pandemic as a qualifying event, many provisions contain catch all language for unforeseen events outside the parties' control.
Tenants should thus articulate to courts the unique and unforeseen nature of COVID-19's emergence, the significant health dangers posed by the virus, and how the pandemic has radically changed — perhaps permanently — the manner in which they do business.
Perrie Weiner is a partner, and Aaron Goodman and Ben Turner are of counsel, at Baker McKenzie.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] In re: Cablevision Consumer Litig
, 864 F. Supp. 2d 258, 264 (E.D.N.Y. 2012).[2] Id. at 5-6.
[3] See In re: Hitz Rest. Grp.
, 2020 Bankr. LEXIS 1470, at *8.[4] Id. at 1292.
[5] Id. at 275.
[6] Louisville & N.R.R. v. Finlay
, 237 Ala. 116, 118 (1939).[7] 140 U.S. 435, 439 (1891).
[8] Fla. Power Corp. v. City of Tallahassee
, 154 Fla. 638, 646, 18 So. 2d 671, 675 (1944).[9] See, e.g., Bailey v. Strippers, Inc.
, 2020 U.S. Dist. LEXIS 90136 (M.D. Ga. May 22, 2020) (assuming without deciding that COVID-19 constituted an "act of God" excuse).[10] See id. at 579.
[11] See, e.g., Great Lakes Gas Transmission Ltd. P'Ship v. Essar Steel Minn.
, 871 F. Supp. 2d 843, 855 (D. Minn. 2012) (noting that, reading the contract at issue as a whole, the defendant "fail[ed] to connect its invocation of the force majeure clause directly with the terms of the Contract" when it alleged that it could not pay under the contract because of an economic downturn); Flathead–Mich. I, LLC v. Peninsula Dev., LLC , Case No. 09–14043, 2011 U.S. Dist. LEXIS 27045 (E.D. Mich. Mar. 16, 2011) ("The state of the market is one of the things on which the parties are gambling when the contract ... is made.") (quotation marks and citation omitted); In re: Millers Cove Energy Co., Inc. , 62 F.3d 155, 158 (6th Cir. 1995) (stating that "[c]ourts and commentators generally refuse to excuse lack of compliance with contractual provisions due to economic hardship, unless such a ground is specifically outlined in the contract"); Coker Int'l, Inc. v. Burlington Indus., Inc., 747 F. Supp. 1168, 1170 (D.S.C. 1990) ("The force majeure clause applies to objective events which directly affect the parties' ability to perform the contract in question, not the ability to make a profit....").For a reprint of this article, please contact reprints@law360.com.
