Commercial Leases in the Time of COVID-19: Force Majeure, Frustration of Purpose, and Impossibility under the Laws of the District of Columbia

On Behalf of Odin, Feldman & Pittleman, P.C. | May 21, 2020 | COVID-19

As landlords and tenants in the DC Metro region navigate the COVID-19 climate and an unprecedented dip in the economy, provisions within commercial leases related to excusing nonperformance are being tested, and in some cases, for the first time. Force majeure clauses are front and center in the debate over excuses for nonperformance, opportunities for termination, and the allocation of liability. However, the common law doctrines of frustration of purpose and impossibility may also be applicable. This article explores the defenses that may be available to commercial tenants in the District of Columbia during the coronavirus pandemic, keeping in mind that in these unprecedented times, case law on the impact of the crisis is developing.
What is a force majeure clause?
Derived from the French language, the term force majeure means “a superior force.” Per Black’s Law Dictionary, the term illustrates “an event or effect that can neither be anticipated nor controlled” and “an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do.” Force majeure circumstances may include both “acts of nature,” such as floods and hurricanes, as well as “acts of people,” such as riots, strikes, and wars.

As applied to commercial leases, force majeure clauses, sometimes identified as an “Act of God” clause or a “For Cause” clause, will generally allocate the risk of loss on the landlord or the tenant in the event the performance by either party becomes impossible or impracticable as a consequence of an event or effect unanticipated or uncontrolled by either party.

What to look for in your commercial lease?

As a result of the contractual relationship between commercial landlord and tenant, lease terms generally control the behavior of the parties. Force majeure clauses are often found in the boilerplate text of lease documents, sometimes overlooked by landlords and tenants alike. Language in such clauses may include whom it covers, what it covers, when it applies, remedies that exist, and any notification requirements. Landlords and tenants should also engage in a thorough review of the lease to identify any additional clauses that define the rights or obligations at issue in a dispute stemming from COVID-19. The following common clauses may play a role in resolving those lease disagreements:

List of Events: Force majeure clauses will often list events, such as Acts of God, strikes, riots, war, terrorism, action by a governmental body, or pandemic. They may also include the broad “catch-all” provisions such as “unforeseeable events,” “or other emergencies,” or “events beyond the reasonable control of the parties.”
Monetary Exclusion: Some force majeure clauses in leases are drafted so as not to apply to a party’s monetary obligations. Thus, a tenant may be required to continue paying rent, and a force majeure clause would not shield it from such an obligation.
Abatement Rights: Some leases will permit an abatement of rent in circumstances where the use of the space leased is impracticable or impossible.
Notice: Some leases may prescribe an applicable notice period, meaning a party who intends to excuse nonperformance under the force majeure clause must provide notice to the opposing side within a prescribed period of time or risk losing its ability to excuse nonperformance.
Business Interruption Insurance Requirements: Some leases may prescribe a tenant to maintain business interruption insurance to ensure rent payments for a predetermined period.
What is frustration of purpose?

In the event a lease omits contractual language likely to govern pandemic-related issues, the common law doctrine of frustration of purpose may be available. The doctrine allows a party to discharge its duties under a contract if the party’s principal purpose is substantially frustrated by unanticipated changed circumstances. In other words, the purpose of the contractual relationship is worthless as a result of the unanticipated change in circumstances. For example, a tenant may be excused under the doctrine of frustration of purpose where actions by a landlord render the property commercially unusable. More specifically, a landlord’s own zoning violations and lack of cooperation in fixing those zoning violations applicable to a tenant’s space could frustrate the purpose of a lease.

What is impossibility of performance?

Similar to the defense of frustration of purpose, the impossibility of performance doctrine will excuse a party from a contract when uncontrollable circumstances have rendered performance impossible. This doctrine usually only applies in extreme circumstances. For example, a lease for a certain piece of property may be rendered impossible if a tornado destroyed the property that was to be leased.

Representative Case Law

While the law of force majeure, frustration of purpose, and impossibility will undoubtedly be tested in the coming months as some disputes over COVID-19 head to court, the following cases typify those defenses in the District of Columbia.

Force Majeure

Courts within the District of Columbia look to the specifically bargained for language that parties select to include within contracts to determine the parties’ intent concerning the event used for excuses in performance.[1] Much like other jurisdictions, courts will engage in an analysis of whether or not the complaining event falls under the purview of the list of events included within the clause. Historically, DC courts strictly construe such lists of events, and in National Association of Postmasters of the United States v. Hyatt Regency Washington, a “For Cause” cancellation clause was not inclusive of scheduling conflicts because such conflicts were not enumerated in the list of events (acts of God, war, government regulation, terrorism, disaster, strikes, civil disorder, [and] curtailment of transportation facilities” nor did it fall under the catch-all provision of “any other emergency.”[2] As would be relevant for COVID-19, landlords and tenants may want to look for language related to pandemics, epidemics, plague, or governmental action. Arguments may also be able to be made for other catch-all provisions, although specificity within clauses will likely result in stronger arguments available to tenants.

In reviewing such clauses, DC courts engage in an additional level of analysis to determine if the complaining event could have been avoided or prevented. In the recent 2019 case involving the rat infestation of a Whole Foods located on Wisconsin Avenue, the court reviewed a force majeure clause in a lease agreement during summary judgment proceedings.[3] In reviewing whether a rodent infestation constituted an “act of God” rising to the level to invoke the force majeure clause, the court focused its analysis on whether the infestation was truly out of the control of Whole Foods or whether or not the grocer could have prevented wholly, or to some degree, the infestation. The court noted “in order to qualify as an ‘act of God’, however, the infestation must be of ‘such character that it could not have been prevented or avoided by foresight or prudence. . . This means that ‘human interference or influence on what could otherwise be considered an act of God . . . precludes an ‘Act of God’ legal defense.”[4] This issue as related to Whole Food’s possible or impossible prevention of the rodent infestation could not be resolved on summary judgment, but it is instructive for future tenants in analyzing whether the event being used as a claim for excuse of performance is one that could or could not have been prevented by the tenant’s interference. Tenants should thus be cognizant of requirements under their lease, although there will likely be some arguments to be made that COVID-19 was out of the control of both tenants and landlords alike.

Frustration of Purpose

DC courts do recognize the frustration of purpose defense, although it is not often applied, and will excuse a party’s (the “promisor”) performance when “changed conditions have rendered the performance bargained from the promisee worthless, not because the promisor’s performance has become different or impracticable.”[5] Such an event will usually occur prior to the bargained for performance.[6] As applied to leases, this defense is relatively untested in DC jurisprudence and the few cases which have contemplated the doctrine ultimately did not apply the defense.[7] Therefore, opportunities for arguments are available to be developed as related to leases being rendered worthless as a result of COVID-19 related restrictions.

Doctrine of Impossibility

In extreme circumstances, the doctrine of impossibility relieves non-performance, but the party asserting the defense bears the burden of proving “a real impossibility and not a mere inconvenience or unexpected difficulty.” [8] This is a defense “where performance is objectively impossible—that is, the contract is incapable of performance by anyone—rather than instances where the party subjectively claims the inability to perform.”[9] Again, case law in DC on its applicability to commercial leases is ripe for development and relatively untested, but DC courts generally engage in a three step analysis, requiring the asserting party to show:

1) the unexpected occurrence of an intervening act;

2) the risk of the unexpected occurrence not being allocated by agreement or custom; and

3) the occurrence making performance impractical.[10]

Notably, a party’s alleged financial inability to perform a contract rarely excuses non-performance.[11] Tenants should thus be on the lookout for facts and events dictated by COVID-19 that render the performance of lease agreements impossible.

What is the Future of Force Majeure Clauses?

Although there remains much uncertainty in each DC Metro jurisdiction as to how force majeure clauses and common law doctrines will be impacted by COVID-19, there is some certainty that parties drafting new leases will be on notice of COVID-19 related events. Presumptively, courts will likely be less inclined to enforce newly written force majeure clauses that do not specifically contemplate such pandemic scenarios, and landlords and tenants are encouraged to advocate for language that protects their interests in such uncertain times should similar pandemics arise in the future.

The attorneys of Odin Feldman Pittleman PC have built a solid reputation for structuring, facilitating and managing real estate transactions tailored to the client’s specific needs for nearly 50 years. Should you need assistance in reviewing a lease agreement, contact OFP’s COVID-19 Recovery Team.

About the Authors:

Jim Miller and Nicole Desbois are associates in OFP’s Litigation Practice. They frequently represent clients in commercial real estate, labor and employment, government contracts and other complex litigation matters.

[1] Nat’l Ass’n of Postmasters of U.S. v. Hyatt Regency Washington, 894 A.2d 471, 475 (D.C. 2006).

[2] Id. at 475-76.

[3] See Whole Foods Mkt. Grp., Inc. v. Wical Ltd. P’ship, No 1:17-CV-01079-RCL, 2019 WL 5395739, at *3 (D.D.C. Oct. 22, 2019).

[4] Id. at *3 (citing Watts v. Smith, 226 A.2d 160, 162 (D.C. 1967) and Am. Nat. Red Cross v. Vinton Roofing Co., 629 F. Supp. 2d 5, 9 (D.D.C 2009)).

[5] Direct Supply, Inc. v. Specialty Hosps. of Am., LLC, 935 F. Supp. 2d 137, 141 (D.D.C. 2013).

[6] Id.

[7] See Island Dev. Corp. v. District of Columbia, 933 A.2d 340, (D.C. 2007) (holding that the NCI Act, with parallel purpose to the lease between the parties as related to the construction, development, use and operation of property for cultural, educational, and family-oriented park, did not frustrate the purpose of a lease).

[8] E. Capitol View Cmty. Dev. Corp. v. Robinson, 941 A.2d 1036, 1040 (D.C. 2008).

[9] Id.

[10] Id. (quoting Nat’l Ass’n of Postmaster of the U.S., 894 A.2d at 477 n. 5).

[11] Id.

Disclaimer: The information contained herein is provided for informational purposes only and should not be construed as legal advice on any subject matter. This information contained herein is not provided in the course of an attorney-client relationship and is not intended to constitute legal advice. Any information contained in this article is not intended to be a substitute for legal counsel. No one should act or refrain from acting on the basis of any content included in this article but should instead seek the appropriate legal advice on the particular facts and circumstances at issue from a properly licensed attorney. The author expressly disclaims all liability in respect to actions taken or not taken based on any of the contents of this article. This article contains general information and may not reflect current legal developments.