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 Virginia 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 Virginia.
Force Majeure
There is relatively little case law in Virginia dealing with force majeure clauses. At least as it relates to “acts of god,” the Virginia courts have established that the act of God must be “the sole proximate cause of the injury.”[1] However, Drummond Coal Sale, Inc. v. Norfolk Southern Railway Company[2] out of the Western District of Virginia provides the most instruction and holds that the boilerplate language used to encompass force majeure events will be strictly interpreted and a general statement of “any cause not within the control of either party” may not be enough to encompass an event not covered in the clause.
In Drummond, the court found that environmental regulations and market shortages were not force majeure events as contemplated by the parties’ agreement. Here, the parties entered into a contract whereby the defendant agreed to provide rail transportation services from a South Carolina terminal to 23 specified coal-burning power plants.[3] Defendant attempted to excuse nonperformance by alleging that the market for imported coal at the majority of the 23 contractually-designated destinations ceased to exist due to newly enacted environmental regulations, which defendant further argued were covered under the contract’s force majeure provision.[4] However, the court interpreted the phrase “any cause not within the control of said party” in the contract’s force majeure clause to cover only those specific causes listed in the contract (i.e., an Act of God, rebellions, strikes, lockouts, interference by civil, military or governmental authority, other civil unrest, etc.).[5] With this narrow interpretation, the court reasoned that changes in government environmental regulations were not covered.[6] As applied to commercial leases, Virginia courts would be expected to engage in a similarly strictly construed analysis of force majeure clauses.
Frustration of Purpose
In Virginia, courts will look closely at the principal purpose of the contract under the doctrine of frustration of purpose. Accordingly, Virginia courts are likely to start with the language of commercial lease agreements to determine whether their principal purposes were truly frustrated by the pandemic. Moreover, where that contract is a lease, Virginia has stated in Kang v. Roof[7] that:
Generally, a lease for a use prohibited by a zoning regulation may be found unenforceable on either of two grounds, illegality of purpose, or frustration of purpose. See generally 37 ALR3d 1018 at 1026; Richmond v. Ewing’s Sons, 201 Va. 862, 114 S.E.2d 608 (1960). However, where there is a serviceable use of the property after the application of zoning restrictions, a lease should be upheld. Pierrepont Street v. Feist, 11 A.2d 727 (N.J., 1940). And, where the zoning laws permit a variance in the regulations and the granting of a permit for the proposed use, one may not avoid a lease. Richmond, supra, 867; Shopping Plazas v. Olive, 202 Va. 862 (1961).
In the above case, the court ultimately found the defendant was excused from performance under the theory of frustration of purpose where the premises was entirely unusable because of the lack of cooperation from the landlord and the landlord’s own actions which prohibited the tenant from making legal use of the property.[8]
In contrast, the Virginia Supreme Court has held the doctrine did not excuse performance in Kirby v. Town of Claremont.[9] There, the plaintiff attempted to argue that an easement on plaintiff’s land had extinguished and reverted to the owner because the purpose of the easement was to provide access to a bridge called Flying Point, which at the time of suit ceased to exist.[10] The plaintiff relied on the language of the easement that provided the easement granted thereby would run “to the easterly beginning of Flying Point Bridge.”[11] The court found that access to the bridge was not the purpose of the easement.[12] Rather, the court reasoned, the purpose of the easement was to provide public street access and that the bridge was merely mentioned as a reference point.[13] As such, in the commercial lease framework, the language of the lease, the context of such language, and the use to which a lease is put are all important factors which a court is likely to evaluate under the doctrine.
Doctrine of Impossibility
The doctrine of impossibility is well established in Virginia courts as follows:
It is . . . fairly well settled that where impossibility is due to domestic law, to the death or illness of one who by the terms of the contract was to do an act requiring his personal performance, or to the fortuitous destruction or change in the character of something to which the contract related, or which by the terms of the contract was made a necessary means of performance, the promisor will be excused, unless he either expressly agreed in the contract to assume the risk of performance, whether possible or not, or the impossibility was due to his fault.[14]
In the context of government regulation, the Virginia courts have found that where “the government has clearly expressed its intent to enforce the law, and the promisor cannot in good faith perform its contractual obligation without violating the law, the promisor is discharged from its obligation.”[15]
In Hampton Roads Bankshares, Inc., the Defendant, Harvard, entered into an employment agreement with Hampton Roads Bankshares, Inc. (“HRB”). The employment agreement provided for a “golden parachute” severance payment.[16] Subsequently, the market crash of 2008 occurred and HRB was forced to enter into an agreement with the Treasury Department under the newly enacted EESA, which eventually passed regulation making golden parachute payments illegal for participating banks.[17] Accordingly, when Harvard attempted to collect his golden parachute payment upon his departure from the company, HRB, after consultation with the Treasury refused to make payment.[18] Harvard sued, and the bank defended using an impossibility of performance defense. The Court found that HRB did not expressly agree to assume the risk of performance whether possible or not, and the contract actually placed the risk of future changes in law regulating golden parachute payments on Harvard himself.[19] Lastly, as stated above, the Court also reasoned that where the law clearly prohibits one party from performing their contractual obligations, such obligations are discharged.[20] A similar argument could potentially be employed in the context of lease agreements where the law, such as stay-at-home orders, prohibits one party from performing.
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] Livingston v. Va. Dept. of Transp., 284 Va. 140 (2012) (citing Cooper v. Horn, 248 Va. 417, 425 (1994)).
[2] Civ. Action No. 7:16cv00489, 2018 WL 4008993 (W.D. Va. 2018).
[3] Id. at *10.
[4] Id.
[5] Id. at *11.
[6] Id.
[7] 24 Va. Cir. 193, 1991 WL 835012, *1 (1991).
[8] Id. at *1.
[9] 243 Va. 484 (1992).
[10] Id. at 491.
[11] Id.
[12] Id.
[13]Id.
[14] Hous. Auth. of Bristol v. East Tennessee Light & Power Co., 183 Va. 64, 72 (1944); see also Hampton Roads Bankshares, Inc. v. Harvard, 291 Va. 42, 53-54 (2016); see also RECP IV WG Land Inv’rs LLC v. Capital One Bank (USA), N.A., 295 Va. 268, 826 (2018).
[15] Hampton Roads Bankshares, Inc. v. Harvard, 291 Va. 42, 56-57 (2016).
[16] Id. at 48.
[17] Id. at 48, 50.
[18] Id. at 51.
[19] Id. at 54.
[20] Id. at 56-57.
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.