COVID-19: Applicability And Understanding of ‘Force Majeure’ Clauses in Lease For Landlords And Tenants During Pandemic

By Advocate Dr. Harsh Pathak

“Remember we are not fighting each other,
but we are fighting the virus.
We are not enemies, but the virus is.”
― De philosopher DJ Kyos

Covid-19 or the Corona Virus was declared as a pandemic on March 11, 2020. This has led to lockdowns and financial slowdown across the country in all sectors. The impact on the common life and livelihood has been severe, and the ‘force majeure’ clauses will play a crucial role if the people are not able to perform their contractual obligations amidst this crisis. COVID-19: Applicability And Understanding of ‘Force Majeure’ Clauses in Lease For Landlords And Tenants During Pandemic

The important document of the state for COVID-19 as a force major event is dated February 19, 2020, of the Department of Expenditure, Procurement and Policy Division, Ministry of Finance issued an Office Memorandum with respect to the ‘Manual for Procurement of Goods, 2017’, which serves as the dictum for procurement by the Government of India . This memorandum, in essence, states that the Covid- 19 could effectively be covered under force majeure clause because it is a ‘natural calamity’ and all the departments who should invoke it by following the ‘due process.’ But this implication of Covid- 19 cannot be upheld for every contract, and the clause needs to be interpreted based on different circumstances.

“Force majeure” as translated from French means “superior force.” As defined in Merriam Webster’s Dictionary, it means “an event or effect that cannot be reasonably anticipated or controlled.” Commonly referred as “FM” clause in contractual documents.

Under Indian laws the spirit of force majeure and the doctrine of frustration have been embodied in sections 32 and 56 of the Indian Contract Act. While the doctrine of frustration is a common law principle, the force majeure clause is a creature of contract. It is a civil law concept that has no settled meaning in the common law. It must be expressly referred to and defined in a contract. The parties shall be excused if substantially the whole contract becomes impossible of performance or, in other words, impracticable by some cause for which neither was responsible.

Indian Contract Act’s sections 32 and 56 are set out herein “Section 32: Enforcement of Contracts contingent on an event happening – Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”, whereas, “Section 56: Agreement to do impossible act – An agreement to do an act impossible in itself is void. The entire jurisprudence on the subject has been observed by the Hon’ble Supreme Court in the case of Energy Watchdog vs. CERC (2017).

Leasing in this context, on use of premise for residential or commercial purpose . The basis of the relationship between a landlord and tenant is a contractual one—the lease.

Terms of Lease depending on the drafting of force majeure clause may have a variety of consequences, including: excusing the affected party from performing the contract in whole or in part; excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate. As defined in Fm Clause.

In the event that a lease does not contain an force majeure clause, the impacted party will not have a contractual basis to claim an excuse for delay or non-performance; however, it may have an equitable claim under the doctrines of frustration or impossibility.

Parts of clause, generally, a force majeure clause contains four parts: 1. identification of who is excluded from performance (landlord, tenant, or both); 2. a list of events that qualify; 3. the obligations of the party that is impacted; and 4. remedies for the other party.

Events as per clause, a force majeure clause may set forth a list of events—act of God, lockouts, strikes, riots, shortages of labor or materials, war, terrorism, unavailability of utility service, action by a governmental body, pandemic, or epidemic—or it may more broadly state “unforeseeable events” or “events beyond the reasonable control of the affected party.”

Catch-all or Blanket clause , even without the inclusion of specific “pandemic or epidemic” language within the list of unforeseen events, a typical force majeure clause may apply to non-monetary obligations of the parties under a lease in the context of disruption in performance relating to COVID-19. This assertion is reasonable especially if your force majeure clause contains a broad “catch-all” or “blanket” provision like “events beyond the reasonable control of the affected party.”

Considerations for landlord and tenant for FM clause in residential and commercial leasing , as each day passes, governmental agencies and officials are instituting policies that will, in all likelihood, disrupt and block commerce and travel, disrupt and suspend labor forces, and interrupt and interfere with manufacturing and supply chains. These governmental actions will have both foreseeable and unforeseeable impacts on landlord-tenant relationships, with widespread ripple effects throughout business operations of all types and at all levels, parties need to identify monetary and non-monetary obligation;

(a) Considerations for Landlords; What the landlord is looking to do through this analysis is understand when it can invoke a force majeure provision if these governmental directions halt its ability to fulfill any non-monetary obligations under a lease and what rights the tenant has should the landlord not be able to perform. Specifically, a landlord should:

1. Review the force majeure clause—whom does it cover, what does it cover, what are the remedies, is there an obligation to notify the other party, and if so, when must that happen? Is there a time limitation on how long a party can use force majeure as a shield.
2. Identify the specific obligations the landlord has under the lease—for example, plan approval and permitting, construction (commencement and/or completion), delivery timelines, and maintenance.
3. Identify the specific penalties or remedies that a tenant may have for a landlord breach of these obligations—monetary damages, extension of time lines, and termination rights. It will be critical to identify potential exposure and how to minimize or mitigate that exposure. This can be accomplished by understanding obligations for notice, cure periods, and extension rights.
4. Be proactive and attempt to identify the areas where a tenant might endeavor to raise a claim under the protection of the force majeure clause.
5. Review insurance policies and consult with legal counsel and industry professionals regarding coverage, notice requirements, and potential claim opportunities. Although it is yet to be seen how the insurance industry will respond, it is likely to assert the argument that COVID-19 is neither an insured peril nor the cause of direct physical loss of or damage to insured property, despite the fact that COVID-19 was unforeseen. This will be an area of continual development that landlords should continue to monitor.
6. In the event that the property is encumbered by debt, then a landlord should review its obligations under its loan documents.

(b) Considerations for Tenants; As with landlords, a tenant’s first priority should be to understand its rights and options under each lease, not just with respect to force majeure, but also other lease remedies to stem potential losses during the COVID-19 pandemic.

1. Review the force majeure clause: Here the tenant’s objective is the same as the landlord’s. Get a firm handle on rights and obligations, qua monetary and non-monetary performance.
2. Insurance protection: Nearly every commercial lease requires the tenant to carry property insurance on its personal property. With courts slowed by the pandemic , tenants should act quickly to consult insurance professionals and legal counsel to assess coverage.
3. Express abatement rights: Some leases in commercial category allow a tenant to abate rent for any event that makes it impractical or impossible for the tenant to use some or all of its premises (including governmental restrictions on use or operation) and, provided the tenant in fact does not use some or all of the premises, the tenant may be entitled to a full or partial rent abatement during the period of non-use. But must notify to the landlord.
4. Co-tenancy provisions/go-dark rights. In the retail sector, some shopping center tenants have co-tenancy rights, which allow the tenant to either reduce rent, cease operations, or terminate its lease. Co-tenancy failures frequently have a cascading effect, such that tenants may use closures as leverage to gain short-term deferral or abatement of rent during the pandemic, as retail landlords are motivated to preserve occupancy, even if overall project rental revenue drops significantly.
5. Holdover rights: In some cases, tenants are ending one lease and starting a new lease elsewhere during the COVID-19 pandemic. Government orders and other factors that may delay move-out and move-in, it is important that tenants and both their current and future landlords are working together to reduce holdover exposure. Tenants should consider options like extended holdover agreements and temporary use swing space for business operations or storing personal property.

Conclusive remarks on rental properties and FM in COVID-19, certainly, these times of COVID -19 and various directions of the state under Disaster Management Act qua lockdown as preventive measure, causing landlords and tenants to inevitably focus on their obligations and applicability of force majeure.

In all instances, it is important for landlords and tenants to understand their rights and that each party has an obligation to notify the other party of the occurrence and timing of an unforeseeable event that makes it impossible or impracticable for such party to perform. If a lease is silent on when parties must invoke remedies, the equitable doctrine of laches provides that a party can lose force majeure and other defenses if it does not act promptly once it has full and complete knowledge of relevant facts.

With responses to the COVID-19 pandemic evolving rapidly, it is also important that notices from one party to the other specifically identify the event(s) giving rising to non-performance while clearly reserving the right to identify additional force majeure events that are unforeseen or unknown at the time notice is given. As the parties try to navigate these uncharted waters, communication between landlords and tenants will be key in maintaining a good relationship between the parties, and it will also preserve rights each party may have should it need to avail itself of legal action in the future.

Landlords and tenants must also appreciate that while understanding force majeure rights and remedies is invaluable, proving actual impact and damages is difficult and litigating these rights and remedies is costly, expensive, and, in a time when courts are either closed or have limited capacity, not susceptible to speedy resolution. Consequently, when parties are armed with knowledge of the rights and remedies in their leases, the most effective resolution is a mediation , negotiated one that balances the needs of the landlord and the tenant. COVID-19: Applicability And Understanding of ‘Force Majeure’ Clauses in Lease For Landlords And Tenants During Pandemic

“During the COVID-19 pandemic,
I would rather take too many safety precautions than too few.”
― Steven Magee