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 Maryland 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 state of Maryland.
Force Majeure
Commercial landlords and tenants reviewing their leases during the coronavirus pandemic should not expect to find extensive guidance about force majeure clauses in Maryland case law. Similar to other jurisdictions, however, the few courts sitting in Maryland to consider the issue appear to agree that force majeure is a creature of contract limited to the exculpatory or conditional language agreed to by the parties at the time of contracting.[1]
For instance, in Bayou Place, a rent dispute that followed Hurricane Harvey, the U.S. District Court for the District of Maryland recently rejected what it termed an “Act of God” defense because it was “undisputed that the Lease at issue d[id] not contain a force majeure clause.”[2] Although the court applied Texas law due to a provision of the lease, when read in concert with other Maryland authority, its reasoning is indicative of how Maryland courts might approach similar issues where a lease does not include exculpatory or conditional language about rent obligations.
Moreover, Bayou Place speaks to the need for landlords and tenants to consider when circumstances constituting a force majeure begin and end to determine how long performance might be rightfully excused. There, the court noted that even if the lease contained a force majeure clause, the tenant stopped paying rent almost two months before Hurricane Harvey and continued to miss payments for three years after the storm. Because the duration of the coronavirus pandemic in the U.S. could be measured using a variety of methods, it is likely to be a point of contention between commercial landlords and tenants evaluating force majeure clauses.
Commercial Frustration
In Maryland, commercial frustration applies “where the purpose of a contract is completely frustrated and rendered impossible of performance by a supervening event or circumstance.”[3] Commercial landlords and tenants seeking to excuse nonperformance during the coronavirus pandemic could nonetheless face an uphill battle asserting commercial frustration. The Maryland Court of Appeals determined before that, “with respect to leases, the doctrine of frustration has been limited to cases of extreme hardship.”[4] Generally, to make a finding of extreme hardship warranting an excused performance, Maryland courts consider three factors:
Whether the intervening act was reasonably foreseeable so that the parties could and should have protected themselves by the terms of their contract;
Whether the act was an exercise of sovereign power; and
Whether the parties were instrumental in bringing about the intervening event.
Foremost among those factors, however, is whether the event was reasonably foreseeable. This is because Maryland courts are careful not to find commercial frustration if it would allow a party to withdraw from a poor bargain that it could have protected itself from through lease negotiations. The Maryland federal court in Bayou Place applied similar reasoning. Specifically, it found that an interruption to the tenant’s profitability following Hurricane Harvey was foreseeable because the lease contractually obligated the tenant to maintain business interruption insurance sufficient to provide for twelve months’ rent.[5] Hence, the tenant’s potential inability to make rent payments for a prolonged period was contemplated by the parties and the tenant could not claim unforeseeable circumstances.
Therefore, to assess the reasonable foreseeability of the coronavirus pandemic as a commercially frustrating event, commercial landlords and tenants should consider reviewing their leases for business interruption insurance requirements and similar terms. And they should similarly consider analyzing executive orders and legislation issued during the crisis as potentially supervening exercises of sovereign power.
Impossibility
In addition to commercial frustration, Maryland courts recognize the closely-related doctrine of impossibility. This typically arises when, after the formation of a contract, facts that a party had no reason for anticipating, and that it was not at fault for occurring, render its performance impossible.[6] Depending on the circumstances, impossibility can temporarily or permanently discharge a party’s contractual obligations.
Within the context of the commercial landlord-tenant relationship, Maryland cases involving impossibility tend to focus on instances where leased premises cannot be used for their intended purposes due to zoning or similar restrictions.[7] Demonstrating a “factual impossibility” of performance under such circumstances can prove challenging. At least one Maryland court held that a lessor could not “rely on invalidity where the doing of that which is said to be forbidden may reasonably be made legal and possible through either administrative or judicial action.”[8] Another determined that a tenant of professional offices “was under an obligation, either on his own or through the [landlords], who were willing to act to attempt to establish a right to continue that use, or at least to wait until impossibility became a fact, not merely a possibility.”[9]
Maryland’s stay-at-home order and related directives, of course, raise questions about the extent to which commercial landlords and tenants forced to shutter operations were obligated to pursue administrative or judicial action to establish impossibility in-fact. At the very least, voluntary closures preceding the state’s stay-at-home order could face difficulties as a basis for factual impossibility in Maryland.
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] See Rockland Indus., Inc. v. E+E (US) Inc., 1 F. Supp. 2d 528, 531 (D. Md. 1998) (distinguishing a case excusing performance based on a force majeure clause because, in the matter to be decided by the U.S. District Court for the District of Maryland, the seller “failed to include any exculpatory or conditional language in the agreed sole source contract to shift the risk to the purchaser.”); see also Lexington Square Partners, LLC v. Mayor & City Council of Baltimore City, 223 Md. App. 768 (2015) (characterizing “force majeure” as a contractual term that acts to prevent a party from being considered in breach or default).
[2] Bayou Place Ltd. P’ship v. Alleppo’s Grill, Inc., No. CV RDB-18-2855, 2020 WL 1235010, at *8 (D. Md. Mar. 13, 2020); see also id.
[3] Acme Markets, Inc. v. Dawson Enters., Inc., 253 Md. 76, 90 (1969).
[4] Id.
[5] Bayou Place, 2020 WL 1235010, at *9.
[6] Stone v. Stone, 34 Md. App. 509, 515 (1977).
[7] See generally St. Luke’s House, Inc. v. DiGiulian, 274 Md. 317 (1975); McNally v. Moser, 210 Md. 127 (1956).
[8] St. Luke’s, 274 Md. at 329.
[9] McNally, 210 Md. at 137.
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.