By Jennifer Sloane
I have received numerous questions from clients as to whether performance under their ground lease (i.e. payment of rent) can be excused pursuant to a force majeure clause in their lease as a result of the pandemic. Let’s review this issue.
What is a Force Majeure clause? A typical force majeure clause in a contract is one that excuses performance of a contract based upon circumstances beyond a party’s control. The word “force majeure” does not have to be used. Courts look to the meaning of the contract language. A typical force majeure clause looks something like this:
Lessee shall be liable for any failure or delay in performance under this Agreement for causes beyond Lessee’s reasonable control and occurring without Lessee’s fault or negligence, including, but not limited to, acts of God, acts of government, flood, fire, civil unrest, acts of terror, and strikes or other labor problems (other than those caused directly by Lessee). Dates by which Lessee’s performance obligations are scheduled to be met, including but not limited to the payment of rent, will be excused for a period of time equal to any of the aforementioned events.
Do I need a force majeure clause to be excused from performance under my lease? No. There are common law doctrines that can excuse performance such as (a) Impossibility – when supervening circumstances make performance impossible, (b) Impracticability – where one would experience extreme, unreasonable, unforeseeable hardship due to an unavoidable event or circumstance, and (c) Frustration of Purpose – an unforeseen supervening event must take place; there must be a mutual basic purpose of the contract that has been frustrated by the supervening event; the event was neither caused by nor within the control of the party; and the event renders the value of performance essentially worthless. These are very strict standards.
As Applied to a Typical Sign Lease: First, you would have to look to the exact language of each lease itself to see what language was used. If you have the word “pandemic” then your odds are much better. However, a viral pandemic is not an act of God, so if all you have is “act of God” wording, then it will not cover the events surrounding COVID-19. An act of government, such as a stay at home order, is also likely to fail as the government order is not the direct cause of an operator’s inability to pay rent. Remember, at this stage of the analysis, you are looking solely at the four corners of your lease and not the “upstream” link to the advertiser. Thus, unless your lease uses “virus” or “pandemic” language, the contract language itself is not likely to help the operator avoid lease payments in the wake of COVID-19. However, the doctrine of frustration of purpose might help the operator. The argument would be that the principal purpose of the lease contract, to pay rent for the right to install and operate a sign to generate advertising revenue, has been frustrated by an unforeseen event (pandemic), and this pandemic has rendered the value of paying rent to the landowner worthless. This is probably the best argument be used when discussing a rent abatement until the pandemic is over. If the matter went to court, applying the doctrine of Frustration of Purpose could at lease create a factual issue requiring a trial.* However courts have clearly held that a mere drop in market demand is not an excuse. (i.e., a lack of demand by advertisers to purchase and pay for advertising upon a sign, is not going to excuse a Lessee from having to pay rent to a Lessor; which differs from contracted advertisers who are unable to pay their invoices due to the pandemic’s impact upon their business).
Based on this analysis, I would argue that an operator could write a letter to a landlord and allege an excuse of performance based on the common law doctrine of frustration of purpose. If nothing else, this will open up the door to negotiations with the landowner to discuss an agreed upon abatement of rent for a few months.
Steps to Take Now: If you think you will trigger a force majeure clause in your lease, you should:
- Keep very accurate records of (a) the act that triggered the force majeure clause: print out the declaration of a pandemic, print out any stay at home orders that rendered your performance unattainable, etc.; (b) print a copy of any required or non-required notices sent to the landowner; (c) keep detailed records of what you did to mitigate your loss or your inability to perform.
- Assess and document COVID-19’s impact on your ability to perform under the terms of your lease agreement.
- If your current force majeure clause requires you to give written notice of a force majeure event, send the notice asap. As always, notices should be sent via certified mail to have proof of performance of the required act.
Think to the Future: There are several things you can do now to better guard against a similar situation in the future.
- Consider revising your form lease agreements to include a detailed force majeure clause that would protect you against paying rent during a “pandemic, hurricane, flood, earthquake, wildfire, fire, tornado, acts of government, acts of terrorism, civil unrest, strikes or other labor problems (other than those caused by the actions of their employer), epidemic, acts of God, or criminal acts by third parties, or any other unforeseen act that causes a loss of income from a majority of advertisers on the sign.” It is important to note that the more detailed the list, the more likely it is that a court would not allow any other acts, besides those listed, to be an excuse for performance. So make sure your list encompasses all potential risks for your sign’s location.
- Make sure your force majeure clause clearly explains what you want to have happen. In the event of a trigger of the force majeure clause, you likely do NOT want to have a requirement to give written notice to your landowner that a force majeure event has occurred. Also, if you are required to give notice per the terms of your contract and you fail to do so, the court will likely rule that you forfeited the force majeure provision. So I would remove any requirement of notice.
Final Note: Check your insurance policies for a possible claim of business disruption claims. Everyone’s policy is different, so it is imperative that you review your policies to determine if there is coverage for the disruptions experienced as a result of COVID-19. Business Interruption policies typically require a “direct physical loss or damage,” however courts have held that impacts to customers can satisfy the requirement of a direct physical loss or damage. If you are a small operator and you had an outbreak of COVID-19 at your place of business, this can be a “contamination” that is likely to give you a better opportunity for coverage. Be aware – many policies have a virus or bacteria exception. Talk to your agent with confidence. You pay for insurance so if there is a clause that can get you coverage for your losses, then call as if you are entitled to the coverage.
Please note – nothing in this article is intended to be legal advice.
*See Rembrandt Enters. v. Dahmes Stainless, Inc., a 2017 Iowa case where an egg producer ordered an egg dryer from Dahmes Stainless. However, Rembrandt suffered an Avian Flu outbreak and lost 50% of it’s egg production capacity, resulting in a loss of many contracts from buyers of the eggs. Rembrandt gave notice claiming Rembrandt was excused from buying the dryer. Rembrant met the elements of frustration of purpose, creating a factual issue for trial.
Jennifer Sloane, Esq.
JSloane@Sloanelawoffice.com
Representing the OOH industry for over 20 years.
[wpforms id=”9787″]
Paid Advertisement
