Give Tenants Force Majeure Relief But Make 3 Key Exceptions

Post-pandemic, tenants are seeking to expand the scope of the force majeure clause.

The so-called force majeure clause excusing a party to a lease from performing its duties if a catastrophic event beyond its control happens has long been a staple of commercial leases. But until recent times, it was largely regarded as boilerplate relegated to the back of the lease with all of the other supposedly inconsequential terms.

All of that changed in 2020 when the COVID-19 shutdowns began. With restaurant, retail, and other public-facing tenants unable to conduct business and generate the revenue they needed to pay rent, the force majeure clause suddenly assumed central importance. And while the COVID-19 crisis has passed, the force majeure clause remains the focus of intense negotiation between landlords and tenants.

The COVID-19 case law has gone predominately in landlords’ favor, with most courts ruling that the shutdowns were not a force majeure event excusing the tenant’s failure to pay rent. But you know the old saying about being once bitten, twice shy. Having learned their lesson, tenants are now seeking to expand the scope of the force majeure clause. Landlords now face the challenge of accommodating tenant demands for broader force majeure protection without leaving themselves totally exposed during the inevitable next pandemic or similar event.

A seasoned New York City attorney has come up with an innovative force majeure clause that balances the needs of both parties in a fair way. The key to the clause is the inclusion of three crucial exceptions to the tenant’s force majeure relief.

Which Parties the Clause Protects

Force majeure clauses can provide relief to a landlord, a tenant, or both. While our Model Lease Clause: Make Exceptions to Tenant’s Force Majeure Relief runs only in the tenant’s direction, the landlord may still be able to rely on common law impracticability and frustration rules to excuse its failure to perform lease duties during a force majeure event. Of course, you can also modify the clause to provide for mutual relief [Clause, Sec. 1].

What Constitutes a Force Majeure Event

The definition of a force majeure event is a key part of the clause. The events that the Model Clause lists are fairly standard and in line with how force majeure clauses were drafted before the pandemic. The one exception is the addition of conditions of supply or demand that are “adversely and materially affected” by war and national, state, or municipal emergency. A clause like this might have given tenants that were harmed by COVID-19 shutdown orders a better chance of relying on the force majeure clause to excuse their failure to pay rent on time during the pandemic [Clause, Sec. 1(e)].

3 Lease Obligations the Force Majeure Event Doesn’t Excuse

In terms of landlord protection, the key part of our Model Lease Clause is the three carveouts of specific tenant lease duties that the force majeure clause doesn’t excuse:

1. Tenant’s duty to pay money due under lease on time. Our Model Lease Clause specifies that force majeure relief doesn’t excuse the tenant’s duty to make timely payment of its monetary obligations under the lease. This is a crucial exception. During the pandemic, several courts denied force majeure relief to tenants that couldn’t pay rent as a result of the COVID shutdowns where the lease expressly excluded timely payment of monetary obligations.

Example: Retailer Hugo Boss signed a lease that included a force majeure clause covering certain “causes beyond the claiming party’s reasonable control (other than causes delaying the payment of money due and payable hereunder)” (emphasis added). While finding that the COVID shutdown order was, in fact, a force majeure event, the New York court ruled that Boss had no legal excuse for not paying full rent because of the carveout language in the lease [Hugo Boss Retail v. A/R Retail, 2021 N.Y. Misc. LEXIS 2580, 2021 NY Slip Op 50458(U), 2021 WL 2006877] [Clause, Sec. 2(a)].

2. Tenant’s duty to timely surrender premises by end of lease term. Making an exception for the tenant’s duty to make money payments is fairly common when drafting pro-landlord force majeure clauses, the New York City attorney acknowledges. However, he adds, this isn’t the case for the other two carveouts contained in the Model Lease Clause that are at least as important.

That includes the exception of the tenant’s duty to timely surrender the leased premises by the end of the lease term. “A landlord must know with absolute certainty the exact scheduled termination date of every lease,” the attorney explains. Without a firm and hard date, the landlord can’t plan the start date of an incoming tenant’s new lease. This could end up costing the landlord a deal if the current tenant doesn’t vacate on time as a result of a force majeure event and the incoming tenant has a so-called walk-away right giving it an option to terminate the new lease should the existing tenant fail to timely vacate. “My exception (b) protects a landlord from this serious eventuality,” the attorney notes [Clause, Sec. 2(b)].

3. Tenant’s duty to carry all required insurance. The Model Lease Clause also specifies that force majeure relief doesn’t excuse a tenant’s failure to carry the insurance coverage required by the lease. That’s a big deal when dealing with tenants who have little net worth and who may become judgment proof by signing a lease in the name of a shell company with no assets. “The insurance policy that the tenant purchases to guard against liability claims and property loss is quite often far more valuable than the credit and financial strength of the tenant itself,” according to the attorney.

So, the landlord should ensure that a force majeure event doesn’t affect the tenant’s obligation to carry the required insurance. Otherwise, the tenant will be able to circumvent its insurance obligations by blaming its failure to obtain the mandatory insurance on an act of God. Result: “The landlord would be left with absolutely nothing—no insurance from an already credit-deficient tenant” [Clause, Sec. 2(c)].