Matthew Nelles & Adriana Kostencki
March 24, 2020. The coronavirus pandemic [COVID-19] that is sweeping the Globe has led to statewide “stay at home” quarantines. In many cities, all non-essential businesses must close or limit themselves to remote operations until further notice. As a result, innumerable stores, restaurants, bars, offices, warehouses, and other physical places of work are empty. Yet rent and other payments on commercial contracts are still due. Or are they?
What are the most common legal defenses in light of COVID-19?
In Florida, there are well-recognized legal defenses, such as “Acts of God,” impossibility of performance, and frustration of purpose, all of which may be raised as a defense to a breach of contract claim.
“Acts of God” relate to unforeseeable events outside human control that no one could have reasonably anticipated, such as hurricanes, flash floods, earthquakes, and other natural disasters. A pandemic such as COVID-19 certainly seems to fit that bill.
“Impossibility of Performance” is a defense that may be asserted where the purposes for which a lease or business contract was made have become impossible to perform.
“Frustration of Purpose” refers to a situation where one of the parties finds that the purposes of the contract have been frustrated to the point that they are not receiving the benefit of the bargain for which they contracted.
Most commercial leases and contracts include “force majeure” clauses
Most commercial leases and contracts account for “acts of God” with what is referred to as a “force majeure” clause. Generally, the concept of force majeure (fr. “superior force”) excuses contractual nonperformance when such nonperformance is caused by unforeseen events beyond the control of both parties that either make contract performance impracticable or frustrate the purpose of such performance.
Force majeure clauses typically excuse nonperformance of a contract for events such as natural disasters, labor strikes, riots, acts of terrorism, and other events that could not have been anticipated.
With respect to stay-at-home quarantines and the shutting down of offices, restaurants, stores, etc., it is very likely that a force majeure clause will suspend performance, including payment on a lease or other commercial contract (including, for example, equipment leases) for as long as the force majeure event continues. Termination of the lease or contract might even be possible if the event continues for an extended period of time.
Is COVID-19 a force majeure?
Some force majeure clauses specifically reference “pandemics” or “epidemics.” Others include broader categories of events that qualify as force majeure events that will excuse performance, including “acts of God,” “acts of government,” or “other circumstances beyond the parties’ control.” Under any of these broader provisions, COVID-19 would likely qualify as a force majeure.
Is COVID-19 still an event that excuses payment performance under a lease or contract that does not contain a force majeure clause?
The answer is probably yes.
If the performing party’s principal purpose of the lease or contract has been frustrated by some unforeseeable event, which occurs by no fault of that party, the party may be able to suspend or terminate the lease or contract. Additionally, a party may seek to be excused from performance under the doctrine of impracticability, meaning that performance has become unfeasible or impossible. The events following and as a result of COVID-19 may qualify under those doctrines.
• Based on the events that have unfolded over the last month, substantial losses in revenue to commercial contracting parties will lead to a multitude of legal disputes.
• In an effort to mitigate a substantial financial impact on each side, the parties to the contract should review their lease or other contract documents to determine their rights and obligations in light of their specific circumstances (temporary or permanent closure, delays in payment, etc.)
• Regardless of which side of the bargaining table you are on, it is important to understand whether the lease or contract contains a force majeure clause.
• If so, look to see whether the lease or contract contains any broad or specific provisions under which COVID-19 may fall.
• Depending on the specific language in the force majeure provision, it may be productive to engage in discussions with the other side about the potential invocation of a force majeure provision and how best to mitigate any possible impact of COVID-19.
• If the provision has a formal notice requirement, be certain to comply with that.
• If the lease or contract does not contain a force majeure provision, these conversations may still be fruitful, particularly where the principal purpose of any given contract may be frustrated or become impracticable due to the impacts of COVID-19.
• In any event, and in light of this global pandemic, contractual parties should engage in good-faith negotiations in an effort to come up with creative alternative solution that can benefit both parties in the long term, and which will avoid lengthy and costly legal actions in the future.
Matthew Nelles and Adriana Kostencki are law partners at Nelles Kostencki, PLLC, a law firm specializing in business litigation, intellectual property, and immigration, with offices in Miami and Fort Lauderdale.