Pandemic Focuses a Spotlight on Force Majeure

The COVID-19 pandemic has put a lot of aspects of commercial real estate under the spotlight. That includes how force majeure clauses are drafted in leases and purchase and sale agreements.

Before 2020, definitions of force majeure didn’t include pandemics. But that is changing. In fact, the provision was something people didn’t give a lot of thought to before the pandemic,  according to Kevin Sher, a partner with Greenberg Glusker.

“In terms of force majeure, specifically, there had always been a boilerplate provision at the back of a lease and not really thought much about. Or sometimes it was not included at all until this [the pandemic] came about,” Sher says.

But now Sher says the pandemic sent people back to their lease or incentives clause to see precisely what it says.

“Of course, many times they would find it made no mention of the pandemic,” Sher says. “Other times, they would find in leases that it was only a unilateral excuse where the landlord’s actions would be excused by virtue of force majeure. But the tenant had absolutely no excuse for any type of force majeure, whether or not the pandemic was mentioned.”

Tenants would also discover that their force majeure didn’t excuse rent payments. “There really wasn’t much thought, in my opinion, put into a lot of these force majeure clauses,” Sher says. “They had been clauses that had been shuffled around in contracts for decades and not dusted off because no widespread event had come to pass, like this pandemic, that shut things down.”

Force majeure isn’t just an issue in retail. Sher also sees it pop up in office leases. “On office leases, I’m seeing tenants markup the force majeure [clause],” he says. “Normally, most of these clauses would say even if it excuses performance by tenant of other obligations, it doesn’t excuse their payment of rent.”

However, Sher says tenants are now providing comments. “Now tenants are marking that up and providing comments saying, ‘It doesn’t excuse my performance of rent if the force majeure continues in effect for three business days,’” he says. “But if it continues for longer than that, then I want rent abatement.’”

While he hasn’t seen many tenants get his concession, it is telling that they’re asking. “This is now at the forefront of everyone’s mind. Both attorneys and sophisticated tenants feel the need to ask for it,” Sher says.

Another issue that arose during the pandemic was the potential for problems with closing. “During the pandemic, everyone felt the need to put something in their purchase and sale agreements that dealt with if wires weren’t going between banks, if FedEx and others aren’t doing their overnight delivery time or if escrow and title companies are closed, then we need to make sure that it didn’t constitute a default by either of the parties and that they’re given that space to close,” Sher says.

Sher said parties found several ways to solve those issues. “Sometimes they [the solutions] were specific to the COVID-19 pandemic. “Later on, they got broader.”