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How The Pandemic Has Not Changed The Force Majeure Clause

Early in the lockdowns of 2020, there was much discourse about the force majeure clause* that exists in virtually every commercial lease: Did the pandemic-fueled lockdown constitute an Act of God and define impossibility? Would tenants therefore be able to cite the force majeure clause in the interest of not paying rent? Moving forward, would force majeure clauses explicitly include government-mandated lockdowns that prevented businesses from operating, therefore allowing tenants the opportunity to stop paying rent during future pandemics? 

Natural disasters are a more commonly accepted form of Force Majeure. Here, damage from the Paradise fire in California. Photo cred: LA Times.

Over a year in, the answer to each of these questions is, decidedly, no. And we have observed that the force majeure clause did not offer and will probably not offer much relief for pandemic-related tenant losses for the following reasons:

  1. The tenant's inability to pay rent - for whatever reason - is often an explicit carve-out in the lease's definition of force majeure and that will probably not change because of numbers 2 and 3, below.
  2. Things didn't get bad enough. Because of the PPP, more businesses survived than one may have expected, and a policy shift towards protecting tenants from paying rent during a shutdown wasn't deemed necessary. Of course, there were exceptions, particularly for businesses who did not qualify for the PPP. But moreover, many lenders' decided to defer (but not forgive) real estate loan payments. In turn, landlords offered rent deferral programs to their tenants at times when revenues halted and tenants' abilities to pay rent did the same. You could call this moment of cooperation a constructive conclusion that the definition of force majeure did indeed include the lockdown.
  3. The commercial real estate market quickly rebounded. To have achieved a systemic shift in the way landlords and tenants treat the force majeure clause, landlords would have needed to be hurting more than they did. Yes, much of the workforce is still working from home, but their employers are still paying their rent, albeit for unoccupied offices. In turn, landlords are still collecting rent to pay their bills and are not hard-pressed to change their ways. If anything, landlords are probably more confident than ever given the health of the market across asset types.

*Check out this article from the American Bar Association that explains the concept and considerations to take, particularly for restaurant owners who lease their real estate.

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How The Pandemic Has Not Changed The Force Majeure Clause

Early in the lockdowns of 2020, there was much discourse about the force majeure clause* that exists in virtually every commercial lease: Did the pandemic-fueled lockdown constitute an Act of God and define impossibility? Would tenants therefore be able to cite the force majeure clause in the interest of not paying rent? Moving forward, would force majeure clauses explicitly include government-mandated lockdowns that prevented businesses from operating, therefore allowing tenants the opportunity to stop paying rent during future pandemics? 

Natural disasters are a more commonly accepted form of Force Majeure. Here, damage from the Paradise fire in California. Photo cred: LA Times.

Over a year in, the answer to each of these questions is, decidedly, no. And we have observed that the force majeure clause did not offer and will probably not offer much relief for pandemic-related tenant losses for the following reasons:

  1. The tenant's inability to pay rent - for whatever reason - is often an explicit carve-out in the lease's definition of force majeure and that will probably not change because of numbers 2 and 3, below.
  2. Things didn't get bad enough. Because of the PPP, more businesses survived than one may have expected, and a policy shift towards protecting tenants from paying rent during a shutdown wasn't deemed necessary. Of course, there were exceptions, particularly for businesses who did not qualify for the PPP. But moreover, many lenders' decided to defer (but not forgive) real estate loan payments. In turn, landlords offered rent deferral programs to their tenants at times when revenues halted and tenants' abilities to pay rent did the same. You could call this moment of cooperation a constructive conclusion that the definition of force majeure did indeed include the lockdown.
  3. The commercial real estate market quickly rebounded. To have achieved a systemic shift in the way landlords and tenants treat the force majeure clause, landlords would have needed to be hurting more than they did. Yes, much of the workforce is still working from home, but their employers are still paying their rent, albeit for unoccupied offices. In turn, landlords are still collecting rent to pay their bills and are not hard-pressed to change their ways. If anything, landlords are probably more confident than ever given the health of the market across asset types.

*Check out this article from the American Bar Association that explains the concept and considerations to take, particularly for restaurant owners who lease their real estate.

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