COVID-19 and your Commercial Lease
These unprecedented times have given rise to much uncertainty. As we continue to adapt, commercial tenants and landlords have many questions since all non-essential businesses have been asked to close down. The main concern is regarding the impact of COVID-19 on commercial leases. A good place to start for this discussion is to explore the concepts of force majeure clauses and the doctrine of frustration of contracts.
What is a force majeure clause?
A force majeure clause is a provision that is included in most commercial contracts or lease agreements. It may allow one or both parties to defer or terminate performance of their obligations as a result of a specified event that is outside of their control. These events could include:
- Acts of God (E.g. natural disasters like earthquakes and tornados)
- Public health emergencies (E.g. epidemics and pandemics)
- Government action (E.g. lockdowns/forced closures and changes in the law)
The list of specified events will vary from agreement to agreement. However, following the SARS pandemic, most commercial agreements include public health emergencies. When reviewing a force majeure clause, it is really important to pay close attention to the exact wording as they tend to be interpreted very narrowly by the courts.
COVID-19 & force majeure
The most obvious argument you can advance is that we are in the middle of a public health emergency as the World Health Organization has classified COVID-19 as a pandemic. You can also argue that as a result of government action (forced closures) the force majeure clause should be triggered. Ultimately, your ability to trigger the clause is going to depend on the specific wording in your contract and your personal circumstances.
A key requirement is that the event must not have been foreseeable. Therefore, the time at which your contract was entered into will be relevant. For example, if you entered into your contract prior to November 2019, the pandemic and forced closures would likely not have been foreseeable. In contrast, if you entered into your contract after January 2020, then it will be harder to establish that the current events were unforeseen.
Am I still obligated to pay rent?
Again, the answer to this question will be entirely dependent on the wording of the clause in your specific agreement. Some lease agreements state that performance of obligations must be impossible in order to trigger the force majeure. Your ability to pay rent might be impossible if you have been ordered to close down your business until further notice. However, the court may still expect you to make your rent payments on time as there are measures in place to assist business owners. Your particular lease agreement may also have a lower threshold for triggering the clause and again, determining this will require a close examination of the specific wording.
If you are seeking to trigger the force majeure clause in your lease agreement, you must ensure you comply with any rules and regulations regarding notice. For example, your agreement might indicate a specific timeline regarding the event and how soon after the notice must be given.
It must be understood that triggering the force majeure clause does not necessarily mean that you will be excused from making your payments. It may just mean that the payments will be deferred to a later date or that base payments will continue to be required.
Frustration of contracts
In the event that your lease agreement does not include a force majeure clause, or the clause is not applicable, you can look to the doctrine of frustration. Frustration of a contract occurs when there is an unforeseen event which has not been accounted for by a force majeure clause. This event must make performance of the contract substantially different from what was agreed upon when entering the contract. As such, requiring the parties to fulfill their contractual obligations will be regarded as unjust. As is the case with force majeure, the event must be unforeseen and not be the fault of either party. In addition, performing the obligations under the agreement must now be impossible.
In comparison to triggering a force majeure clause, the threshold to establish the frustration of a contract is much higher and harder to satisfy. The consequences of a frustrated contract are also very different, as the parties are no longer required to fulfill their obligations and the contract is brought to an end. As such, the frustration of a contract can have more serious implications not only for the tenant who will lose their business location, but also for the landlord who will now have empty property.
It is understandable that the uncertainty during this time can be very daunting, especially when there is limited to no cash flow. The government has acknowledged this and has stepped in by setting up various aid packages for small businesses. This includes additional funding for credit and lending to small businesses, deferring the date for tax payments and payment assistance for employees and operating costs. The government has also deferred dates for mortgage payments which may result in more lenient landlords.
Ultimately, it would be wise to commence an open discussion with your landlord since it is very likely that you are both feeling the impact of COVID-19. Steps taken by the government may allow more flexibility for your landlord which in return may result in increased flexibility for you. Adjustments such as suspending rent payments or making only the base payments can be discussed with your landlord. However, if any agreements are made, you should always ensure that you get them in writing.
This information regarding the impact of COVID-19 on your commercial lease is only meant to provide a brief outline of the options you have. Prior to taking any steps regarding your commercial lease, you should consider consulting a business lawyer. During this time, I remain available remotely to assist with any questions or concerns you may have.
Need support with your commercial lease?