Beyond the Boilerplate: How to Negotiate the Force Majeure Clause

It’s among the least appreciated parts of the lease. But while rent, renewal, and other business terms command most of the attention, the so-called force majeure clause takes center stage when disasters occur. It’s at that point that both landlords and tenants recognize the importance of the clause and kick themselves for using generic boilerplate language rather than making the effort to negotiate a force majeure clause that makes sense for their particular situation.

Force Majeure Basics

You-know-what happens. And that’s why force majeure (Latin for “superior force”) clauses exist. The clause excuses a party to a lease from performing its duties if a catastrophic event beyond its control happens. It’s like an insurance policy you get but hope to never use; but when it does come into play, the drafting of the terms becomes a five-, six-, or seven-figure issue.

If you don’t believe it, just ask One World Trade Center. Its pre-9/11 lease included what was then a standard clause listing “acts of war” as a force majeure event. One of the building’s largest tenants, a securities firm, relied on the clause in a bid to recover the “front-loaded” rent it paid just before the terrorist attacks of Sept. 11, 2001. But the court said no dice, finding that terrorist attacks didn’t count as “acts of war.” These were “sophisticated commercial tenants” that “bargained away their right to hold the lessor liable for nonperformance in the face of the tragic, unanticipated events which destroyed the building,” the court concluded [One World Trade Ctr. LLC v. Cantor Fitzgerald Sec., 2004 NY Slip Op 24444].

What would happen if there was no force majeure clause in the lease? Answer: The tenant would be subject to the vagaries of the common law rules of impracticability and frustration of purpose.

Impracticability: When a party is excused of its responsibilities because performance has been made impracticable—that is, excessively burdensome—by a supervening event that it didn’t cause, foresee, or guard against in the lease.

Frustration of purpose: When a party is excused because a supervening event fundamentally changes the nature of the lease and makes the party’s performance worthless to the other.

The force majeure clause allows the parties to take control and tailor a relief solution that works better for them.

EIGHT ISSUES TO CONSIDER

Although the phrase “negotiate a force majeure clause” is a bit of an oxymoron, those who rely on the boilerplate do so at their own peril. So, take the time to negotiate your own terms. And while bargaining power will go a long way in determining the outcome, there are eight key questions you must consider to come away with the right clause.   

1. Which Parties Does the Clause Protect?

The first question is which party should get relief for a force majeure event—the landlord, the tenant, or both. Force majeure protection typically runs in both directions, but it can be limited to just one side, leaving the other party to rely on the common law impracticability and frustration rules [Clause, Sec. 1].

2. Which Duties Does the Clause Excuse?

The next thing to determine is which lease duties are subject to the clause. There are certain duties landlords should try to carve out and require tenants to perform regardless of external events, including the obligation to:

• Pay rent;
• Surrender the premises at the end of the lease; and
• Maintain required insurance.

The tenant may also want to carve out some of your obligations, like the duty to return the security deposit at the end of the term [Clause, Sec. 1].

3. What Constitutes a Force Majeure Event (Listed Events)?

The definition may be the most important part of the force majeure clause. When force majeure relieves the tenant of lease responsibilities, you want to keep the scope as narrow as possible. Conversely, you want the broadest possible clause when it applies to your own lease obligations. In either situation, recognize that courts interpret these clauses very narrowly, as illustrated by the Cantor Fitzgerald case above. Accordingly, modifiers like “unforeseen,” “tragic,” and “natural” may limit the scope of the clause. A broader definition would include any act, event, or circumstance beyond the party’s control and that wasn’t caused by its own negligence or failure to exercise reasonable diligence. List examples of force majeure events, which typically include major risks like:

• Flood, earthquakes, hurricane, tornado, fire, explosion, volcanic eruption, epidemic, etc., whether natural or man-made;
• Acts of war, armed conflict, embargo, revolution, sabotage, riot, terrorism, bioterrorism, ecocide, or threat thereof;
• Strike, lockout, or other industrial disturbances; and
• Government acts, court orders, laws, regulations, statutes, ordinances, rules, regulations, or other actions taken after the lease goes into effect [Clause, Sec. 2(a)].

4. What Constitutes a Force Majeure Event (Catch-all Phrase)?

Because it’s impossible to anticipate every contingency, force majeure definitions usually end with a catch-all phrase purporting to include everything not specifically listed—for example, “or any other events not within the reasonable control of the party affected.” The problem is that courts may not give effect to these catch-alls.

Explanation: In interpreting a legal document, courts follow a principle of construction called expressio unius est exclusio alterius, meaning when one or more things of a class are expressly mentioned others of the same class are excluded. When applied to force majeure, it means the clause is seen as covering only the events listed in the lease.

Example: A “liability insurance crisis” prevents a tenant from getting the insurance the lease requires. The tenant claims force majeure, citing the catch-all “other similar causes beyond the control of such party” language in the lease. But the court finds no force majeure because insurance market disruption wasn’t one of the listed events and was different in kind and nature from the events that were listed [Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900].

There are two things you can do to combat the expressio unius est exclusio alterius effect and enhance the enforceability of a catch-all phrase:

• Include the phrase “including but not limited to” or “including, without limitation” before listing examples of force majeure events [Clause, Sec. 2(a)]; and
• Include the phrase “whether similar or dissimilar in kind and nature to any of the foregoing” at the end of the catch-all language [Clause, Sec. 2(a)(viii)].

5. What Doesn’t Constitute a Force Majeure Event?  

A landlord doesn’t want tenants to be able to claim force majeure for all forms of adversity, especially if the tenant had a part in causing or could reasonably have prevented it with proper care and diligence. List examples of excluded events, which may include:  

• Breakdown or failure of machinery or equipment that the tenant caused or could and should have prevented;
• Non-availability of equipment, supplies, personnel, or other resources for which the tenant could have made reasonable provision;
• Economic events like market failures or the liability insurance market crisis cited by the tenant in the Kel Kim case above;
• Non-availability or lack of funds due to circumstances within the tenant’s control; and
• Denial, revocation, withdrawal, expiration, or failure to obtain government or other regulatory approval that the tenant could have obtained, maintained, or extended or didn’t get because it didn’t follow the required procedures or meet the required terms and conditions [Clause, Sec. 2(b)].

6. What Notice Must the Tenant Provide?

Next, establish a process for exercising force majeure rights, especially when the tenant is the party claiming relief from lease obligations. The starting point is notification. Make the tenant’s force majeure rights contingent on its obligation to:

• Notify you that a force majeure event has occurred within a stated deadline, such as 24 hours [Clause, Sec. 3];  
• Provide you with follow-up information about how long it expects the event to last and how it will affect its lease performance as soon as possible thereafter, such as within three days of initial notification [Clause, Sec. 5];
• Allow you to inspect the site of the claimed force majeure [Clause, Sec. 4]; and
• Provide you with periodic progress reports on the situation [Clause, Sec. 8].   

7. What Must Tenant Do to Mitigate the Damage?

Require the tenant to use “commercially reasonable efforts” to minimize damages and resume performance of its lease obligations when a force majeure event occurs [Clause, Sec. 7].

8. What Kind of Relief Does the Tenant Get?

Indicate whether the occurrence of a force majeure event discharges or simply delays the tenant’s duty to perform the lease obligation. If it’s the latter, specify exactly how much extra time the tenant gets. Otherwise, the tenant may try to extend the delay indefinitely. Also require the tenant to pay the additional costs you incur as a result of the delay. Last but not least, reserve your right to terminate the lease if the delay lasts more than a stated amount of time, such as 120 days [Clause, Sec. 9].