COVID-19: How Businesses Can Satisfy Their Obligations Under Commercial Leases In This Environment

By Jess Frey
Taylor Porter Special Counsel
jess.frey@taylorporter.com

As state governments issue orders that prohibit or limit the operations of businesses in an effort to reduce the spread of the 2019 novel Coronavirus (named COVID-19), businesses will struggle to satisfy obligations (both financial and otherwise) under their contracts.

For businesses that lease property, these obligations include not only the payment of rent but also the obligation to continuously operate the business, which is imposed under a common provision in commercial leases, especially those for shopping centers and where the tenant is obligated to pay a percentage of its revenue (or sales) as rent to the landlord. Most commercial leases have force majeure clauses that provide that, if either party under the lease is delayed or prevented from performing its obligations where such delay is due to a “force majeure” event, the party that is delayed or prevented from doing or performing the act or thing shall not be liable or responsible for any such delays, the doing or performing of such act or thing shall be excused for the period of the delay, and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. Force majeure provisions will excuse, in most cases, the tenant’s continuous operation obligation under commercial leases. Continuous operation provisions in commercial leases provide that the tenant is obligated to continuously and without interruption operate its business on the premises. Under these provisions, the tenant is often excused during temporary closures, such as holidays or short periods of time to allow for repairs or remodeling, all of which are approved in advance by the landlord.

A force majeure provision such as the one referred to above would also excuse a tenant from maintaining operations on the premises during a “force majeure” event, which is defined under the commercial lease. Most commercial leases define “force majeure” events as strikes, lock outs, weather conditions, breakdown, accident, casualties, acts of God, epidemics, failure of power, governmental laws, orders or regulations, actions of governmental authorities, riots, insurrection, war or other causes beyond the reasonable control of that party and not due to the fault or negligence of that party, or for any cause due to any act or neglect of the other party or its servants, agents, employees, or any person claiming by, through or under the other party.

For rent obligations, it’s not that easy. Force majeure events usually don’t apply to a tenant’s rent obligations because most commercial leases are drafted by the landlord’s attorney and thus favor the landlord. For example, force majeure provisions typically provide that (1) in no event will a force majeure event excuse or extend the time for paying any rent, and (2) in no event will a lack of funds be considered to be a “force majeure” event for either party under the lease. Thus, force majeure arguments, pursuant to contractual provisions or under law (see Louisiana Civil Code Article 1876), generally will not give businesses the same relief from its obligations, unless you have a good attorney to assist you with negotiating your lease and making the argument or you have leverage when negotiating the lease.

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