A common question from tenants and landlords in the past few weeks has been whether the coronavirus crisis excuses a tenant’s failure to timely pay rent and what obligation a landlord may have to accept late rent payments.
It is common for commercial leases to include language excusing non-performance due to “acts of God” or unforeseeable events beyond the control of the parties in which neither party is at fault. These force majeure (French for “superior power”) clauses are intended to provide protection to the parties in the event of unforeseeable events. Below are two examples of a force majeure clause.
- Neither party shall be liable for any costs or damages due to delay or nonperformance under this Agreement arising out of any cause or event beyond such party’s control, including, a labor strike, work stoppage, power or other mechanical failure, computer virus, or natural disaster.
- The parties hereunder shall not be held in breach of this Agreement due to delay or nonperformance under this Agreement arising out of unforeseen events, acts of God, or other circumstances of force majeure.
Under Ohio law, a party seeking to invoke a force majeure clause must prove (1) the event was beyond the party’s control and (2) the party seeking to utilize the clause is without fault or negligence. Stand Energy Corp. v. Cinergy Servs., 144 Ohio App. 3d 410, 416, 760 N.E.2d 453 (1st Dist.). As the Court noted:
“Force majeure clauses are included in commercial contracts to provide flexibility in a volatile economy. Mistaken assumptions about future events or worsening economic conditions, however, do not qualify as a force majeure.”
The key question that must be answered by the party seeking to utilize the force majeure clause is whether this current crisis and the related stay-at-home order was foreseeable. If the crisis was foreseeable, then failing to account for it was simply the result of a mistaken assumption. On the other hand, if the crisis was not foreseeable, then the inability to perform is likely excusable under the force majeure clause.
Given the periodic outbreaks of disease that have occurred during the past 20 years, it could be argued that there was nothing unforeseeable about a disease affecting large swathes of the United States. On the other hand, an order from the State of Ohio prohibiting gatherings of more than 100 people and closing all non-essential businesses could reasonably be considered unforeseeable given that it had never happened before. Assuming a court finds that the protection of the force majeure clause does apply to the coronavirus crisis, several questions remain unanswered.
- How long does the protection of the force majeure clause apply?
- Would business interruption insurance coverage provide a source of recompense?
- If a business could open because it was deemed “essential” but chooses not to or opens but does greatly reduced business due to the coronavirus crisis, does force majeure protect the business’s non-performance under a commercial lease?
- May a landlord demand all deferred payments be paid at once when the protection of the force majeure clause ceases?
- May a landlord charge interest on the deferred payments?
Many of these questions do not have easy or immediate answers under the established case law. If you have questions about how coronavirus will impact your business, please reach out to one of the attorneys at Kemp, Schaeffer & Rowe. We remain open for business to assist our clients. We offer consultations via Facetime, telephone or Zoom conferencing as we stay committed to our clients and the practice.