Force Majeure: Can COVID-19 Excuse Performance of Lease Obligations?

March 23, 2020

COVID-19 (coronavirus) has brought with it a virtual tidal wave of legal questions. An important one: may a tenant invoke a force majeure (French for “superior force”) clause to avoid paying rent to a landlord in the event of a government lockdown or quarantine? Unfortunately, the answer is, “it depends.” Interpretation and application of any contractual force majeure provision is highly dependent on the particular terms of the clause in question and the circumstances causing a disruption of normal business activities. Other contractual performance doctrines may come into play, such as impossibility of performance and frustration of purpose. Both doctrines refer to occurrences or causes beyond one’s control, and therefore without fault.

A threshold question is whether force majeure applies as a result of COVID-19/novel coronavirus. One recent article observes that “a force majeure clause could cover the COVID-19 pandemic if it includes specific public health-related language, such as ‘flu, epidemic, serious illness or plagues, disease, emergency or outbreak.’” “Acts of government” may also trigger force majeure, but absent other reference to such health-related events, the catch-all phrase “Acts of God” often included in a force majeure clause may not apply. As another article aptly puts it: “An ‘Act of God’ alone may be too broad to excuse a party from performance.” Most courts narrowly interpret force majeure clauses, and that level of strict scrutiny may pose a real challenge where the clause does not specifically mention something relating to public health events.

On the other hand, Ohio, like many other states, has public health laws that may be useful in establishing force majeure/impossibility/frustration. Ohio law provides that “The director of health shall investigate or make inquiry as to the cause of disease or illness, including contagious, infectious, epidemic, pandemic, or endemic conditions, and take prompt action to control and suppress it.” Another Ohio law prohibits any person from violating “any rule the director of health or department of health adopts or any order the director or department of health issues under this chapter to prevent a threat to the public caused by a pandemic, epidemic, or bioterrorism event.” Violation of an order of the Director of Health is punishable as a second-degree misdemeanor.

There are only a handful of reported cases that construe Ohio’s laws regarding orders by the Director of Health, and none deal with large-scale pandemic/epidemic events such as the COVID-19 virus. However, both the Ohio Governor and the Ohio Director of Health have issued an official “Stay At Home” Order, mandating that all non-essential business and operations must cease, except for specifically-permitted Essential Businesses and Operations. Therefore, tenants who are not engaged in Essential Businesses and Operations seemingly may have a good argument that rent should be abated during the time period that this Order is in effect. There will undoubtedly be litigation over these issues in the months and years ahead because this Order has required the closure of numerous retail and service businesses, cutting off cash flow to these tenants and in turn compromising their ability to pay rent to their landlords.

At the same time, there is case law holding that these type of closure orders do not constitute force majeure so as to excuse a tenant’s performance under a lease. For example, in Aukema v. Chesapeake Appalachia, LLC, landowners brought an action seeking to declare that certain oil and gas leases had expired and were not extended by force majeure. Defendants argued that a state directive that placed a moratorium on hydraulic fracturing constituted force majeure that excused lack of actual performance, and thereby permitted automatic lease renewal (which was tied to actual drilling operations). The court rejected this argument, noting the state directive permitted alternative drilling operations that could have been performed by defendants so as to trigger automatic lease renewal. The court also rejected claims that the state directive frustrated the lease’s purposes, reasoning that the frustration doctrine requires an event that is unforeseeable, and the directive in question was foreseeable when the leases were “signed, renewed, and assigned.”

Another relevant case, though not involving a commercial lease, is Phelps v. School Dist. No. 109, Wayne County. There, the question was whether a school district had to make payments to a teacher who was under contract with the school board when her school was closed for two months “by order of the state board of health on account of the influenza epidemic . . . .” The trial court sided with her and awarded her $100, representing two months of pay. In upholding this judgment, the Supreme Court of Illinois observed that the move to close the building did not alter the rights of the parties to the contract. Therefore, it is prudent to require a provision in the contract that specifically exempts one from liability in the event of an epidemic or pandemic.

A more limited application of contractual frustration is seen in Colonial Operating Corp. v. Hannan Sales & Service. There, the parties entered into a lease under which the tenant was permitted to use the premises only for an automobile showroom. Five years after entering into the lease, the Office of Production Management of the United States issued a directive prohibiting the sale of model year 1942 automobiles or any automobiles that had been driven less than 1,000 miles. When the landlord sued to collect unpaid rent, the tenant claimed that the OPM order had frustrated the purpose of the lease, thereby discharging the tenant’s obligation to pay rent. The New York Supreme Court, Appellate Division, held that the trial court erred in finding that the lease’s essential purpose had been frustrated, relying on the fact that the OPM order did not completely “prohibit, ban or frustrate the sale of all automobiles in the demised premises.” Rather, the appellate court noted, the OPM directive still permitted sales of other automobiles, including sales to government entities and other various “eligible” parties. Further, the OPM directive did not prohibit the sale of “second-hand automobiles and automobile accessories . . . .” This case reinforces that there must be a fact-specific inquiry into how a government order specifically impacts the tenant’s operations of its leased premises.

Make no mistake: In Ohio alone, there will be hundreds of millions of dollars at stake on the issue of rent suspension due to the effects of COVID-19. Ohio tenants will have the “benefit” of the “Stay At Home” Order and other orders issued by the Governor and the Ohio Director of Health to bolster their arguments of force majeure, impossibility of performance, and frustration of purpose.

Based on the examples above, success may not be assured for tenants invoking these principles in defense of eviction and back-rent claims by landlords. Meanwhile, landlords must still make mortgage payments, pay insurance premiums, and incur operating expenses. One can envision a scenario in which both landlords and tenants become insolvent and are unable to pay debts in the ordinary course. Payments in response to claims under business or rent interruption insurance policies may have the potential to cover some of these cash flow gaps, but it is becoming fairly clear that insurers are taking the position that such policies do not cover claims arising from COVID-19 losses. (A bill was introduced and quickly withdrawn recently in New Jersey which would have compelled insurers to honor business and rent interruption claims due to COVID-19. Read about that here.) It would appear that only the federal government has the resources to craft a rescue of those impacted by the loss of rental income in this crisis.