The pandemic has impacted businesses in many ways. There are supply chain issues that can prevent regular operation. There are challenges in finding new hires to replace departing staff. There are economic downturns and inflation. These are all common reasons for not meeting business obligations during the pandemic. It could mean that it is impractical or impossible to enforce a lease agreement between landlords and tenants.
How a force majeure clause works
Force majeure clauses are a part of many contracts, including lease agreements. They address events that cannot be reasonably anticipated or controlled in a contract, sometimes known as acts of God. The concept would seem to apply to many businesses closed or deeply impacted by the pandemic. It does not excuse a party from fulfilling its contractual obligations, but it can justify the delay in delivering contractually binding services, goods, payment or other arrangements. It can involve such varied situations as a landlord not finishing a space for a new tenant or upgrading the space for the existing one because there are no materials available. It can also mean that the tenant cannot pay rent.
Present and future applications
While many contracts did not have force majeure clauses that specifically address a pandemic or the government shutdown, tenants and landlords argued that these qualified as force majeure events. Moreover, many are moving to clarify that issues for the future — there now is often language regarding pandemics, epidemics, health crises and shutdowns qualify as force majeure in new leases. These new conditions are added to a list that may involve war, acts of terrorism, civil unrest, invasion, tornados, floods, hurricanes, and other man-made events or natural disasters.
What if the business does not make it?
From a commercial real estate perspective, owners and occupants of brick-and-mortar spaces for businesses or retail had their worlds impacted by the pandemic more than most, and some did not survive:
Closure: Whether mandated by the local or state guidelines, some businesses closed or turned to work from home arrangements. This prompted a glut of empty space.
Sale of the business: Perhaps an owner wants to sell their business or franchise in a package that includes the space because there is additional value in doing so. Depending on your perspective, force majeure clauses can give the landlord approval over the sale or limit their input.
Expect the unexpected
These are cautious words of wisdom, particularly when something happens beyond the landlord or tenant’s control. In many cases, the two sides can use the force majeure clause to find a solution for surviving these unprecedented times. Perhaps the force majeure allows business owners to better prepare for the next unforeseen challenge.