Many property owners and tenants today are wondering about the legal implications of the Covid-19 virus on leases and real estate contracts. These issues can be complex, often involving paragraphs of dense legalese. Valensi Rose has prepared this plain-English summary of key areas in which the pandemic (and government efforts to deal with it) may affect leases and real estate contracts.
If you think any of these may be relevant to your business, we invite you to contact Bob Weiss, the leader of our real estate team.
1. Force Majeure or “Act of God” Provisions
- Force majeure, a phrase derived from French law, refers to an overwhelming, unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado, that makes it impossible to fulfill a lease or other contract. A similar term is an “act of God.” These concepts have expanded to include war, acts of terrorism, strikes and civil disorder.
Rarely, however, do force majeure clauses include the words “epidemic”, “pandemic” or “disease.” If they are not specified, insurance companies are denying Covid-19 claims as a force majeure trigger. It is anticipated that the denials will result in extensive litigation, and it is likely to be years before there is any established case law resolving the issue. - The contract language must be carefully reviewed. Most force majeure clauses do not allow a tenant to stop paying rent or other financial obligations. In addition, these clauses typically become effective only after some sort of physical destruction, such as a fire or earthquake. Despite this, tenants must preserve whatever rights they might have by sending their landlords written notice that they are invoking the force majeure provisions of their lease.
- Financial hardship or inability to pay is, by itself, not a force majeure event, according to numerous court decisions. However, if that hardship results from government actions, such as closings, reduced capacity or other changes mandated in response to the pandemic, courts could see things differently. It is likely to be many years before the issue is judicially resolved.
2. Common Law Provisions
- Tenants may be able to take advantage of some provisions of common law:
(i) Impossibility. This means that if a truly unforeseeable event makes it impossible to comply with a lease or contract, the non-performing party is not considered to have defaulted on the agreement. Certainly the Covid-19 pandemic and its business impacts qualify as unforeseeable.
(ii) Impracticability. This become applicable when an obligation isn’t impossible, but can only be done at an excessive and unreasonable cost. These cases are highly fact-dependent. Courts tend to construe “impracticability” narrowly, and generally don’t extend it to cover the inability to pay rent.
(iii) Illegality. In simple terms, a contract cannot compel you to break the law. When California’s governor and mayors required businesses to close, and the governor made it a misdemeanor to go to work, it arguably voided any obligations you may have under a contract or lease that would have required you to act in violation of those mandates. However, unless the entire lease is unenforceable because of the illegality, landlords will challenge tenants who withhold their rent.
(iv) Frustration of purpose. This is a defense to an enforcement of a contract or agreement that comes into effect when an unforeseen event undermines your ability to use the property as specified in the lease. For example, if pandemic rules prohibit a sit-down restaurant from seating patrons, this “frustration of purpose” may make the lease unenforceable for the period of time the premises cannot be used.
3. Going Dark
- A “go dark” provision in a lease allows or prohibits a tenant from operating its business from the leased premises. Depending on the wording of the agreement, a “go dark” clause can be used by the landlord or tenant to terminate a lease. However, if a landlord closes its building, it would be difficult for that landlord to seek compensation from a tenant who “goes dark”.
- Many insurance policies expressly exclude loss or damage caused by a contamination, disease or virus, or their effects.
- Business interruption insurance is likely not applicable to Covid-19 losses, because it generally requires physical damage to the property.
- It would nevertheless be prudent for claims to be made by the insured parties in the event subsequent case law determines that Covid-19 losses are, in fact, insured events.
- Landlords should be aware that changes to leases can violate loan agreement covenants, such as minimum debt service coverage. Therefore, any changes should be reviewed carefully before a lease modification is signed. It is also important to determine if the loan agreement includes a force majeure provision.
- Many other issues, too numerous for this brief overview, should be considered and discussed with the lender before a landlord agrees to a lease modification.
- Pending purchase and sale agreements may be affected by Covid-19 issues, and should be carefully evaluated. Example of topics to consider include due diligence inspections, operating covenants, survival periods, tenant estoppels, financing, and closing extensions.
There is bound to be litigation about the wide variety of issues arising from Covid-19, and it may go on for years. It is almost always wiser, as well as cheaper and faster, to avoid getting embroiled in such litigation. For disputes between landlords and tenants, or between buyers and sellers, mutually acceptable forbearance agreements of other negotiated settlements are preferable to heading for the courthouse. Valensi Rose remains available to negotiate and document the settlements, and to provide all other legal assistance you may need at this crucial time.
You can contact Bob Weiss at (310) 601-7010 or This email address is being protected from spambots. You need JavaScript enabled to view it..