April 15, 2020

COVID-19 and commercial leases: Force Majeure

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I’ve received a few calls over the recent weeks related to COVID-19 and commercial leases. Namely, "I can’t pay my rent. What do I do now?” or “I’m closed so what happens with my rent payment?

While we are definitely in uncharted territory in many respects during this pandemic, there is actually a clause in most commercial contracts built for this kind of emergency. It is called a Force Majeure clause. It’s both French and boilerplate so you may not have paid much attention to it, but right now it could be important. It literally means “superior force” and protects parties against an event that can’t be reasonably anticipated or controlled---like this pandemic.

Here is an example from a commercial contract:

Force Majeure. Neither party shall be liable for any costs or damages due to delay or nonperformance under this Agreement arising out of any cause or event beyond such party’s control, including, without limitation, cessation of services hereunder or any damages resulting therefrom to the other party as a result of work stoppage, power or other mechanical failure, computer virus, natural disaster, governmental action, or communication disruption.

And here is an example from a commercial lease:

Force Majeure. Any prevention, delay, or stoppage of performance due to strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform (financial inability excepted), shall excuse the performance of such party for a period of time equal to the period of any such prevention, delay, or stoppage, except that the obligations of Tenant to pay Base Rent, Percentage Rent, Operating Costs, and other charges hereunder shall in no event be excused or delayed pursuant to this paragraph.

I’m sure you noticed the difference, right? In most leases, this clause will not help you with rent or things like your operating or common area maintenance charges. And while the Governor has suspended housing evictions for 120 days in Arizona, this does not apply to commercial leases. So what can you do? Communicate immediately. Talk to your landlord’s rep and tell them your situation. Follow up with a letter. If you have some cash flow or emergency funds in your business, offer to pay what you can. You can also ask about fully abating your rent for some period of time and extending your lease term. I’m hoping that the fact that everyone is in this perilous economic soup together, landlords (who are not generally the most sympathetic) will see the bigger picture and work with you. Remember, tenants not paying them may mean they can’t pay their lenders either. This is the first time that I can remember that the pain of small business closings, the lifeblood of our economy, will have a serious trickle-up effect. I’m happy to answer any questions you have about anything. I know what it’s like to own a small business. Stay as positive as you can because we will get through this together