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By: Deborah Yoon Jones, Alston & Bird LLP
This article explains what a force majeure clause is and how and under what circumstances a force majeure clause in a commercial lease may be invoked due to the novel coronavirus (COVID-19).
THE ARTICLE ADDRESSES THE LIKELIHOOD THAT A FORCE majeure clause will be enforced in California, other related impossibility defenses, and considerations for commercial lessors and lessees going forward. Have no doubt about it—if you are a lessor or a lessee (or their counsel), you will be forced to understand the concept of force majeure in the months or even years ahead.
Remember when the 2008 financial crisis seemed like the worst thing that could happen to a generation? Or perhaps in the past, your client’s business was interrupted by bad weather, earthquake damage, or even an outbreak of norovirus or other sickness halting or disrupting operations for a short while. No one could have imagined the situation that the world finds itself in now, and we are undoubtedly just beginning to see the ripple effect that the COVID-19 pandemic will have on businesses around the world.
California is one of the states with the highest numbers of infected individuals in the country. Governor Gavin Newsom has ordered all residents of California to stay at home “except as needed to maintain the continuity of operations of the federal critical infrastructure sectors.”1
The Safer at Home Order permits only specified essential businesses to remain open, which includes businesses in the commercial facilities sector. As a result, commercial real estate lessors and lessees have been closely reviewing their leases for a contractual basis to consider the likely mounting requests for rent relief, abatement, waivers, excused performance, or even notices of termination. Undoubtedly, force majeure clauses are being carefully considered to determine next steps.
General commercial contracts (including commercial real estate leases) often contain a force majeure clause that excuses performance of the contract under certain specified conditions. While some may equate force majeure with only excusing acts of God, such as extreme weather events (e.g., tornadoes, hurricanes, earthquakes, etc.), force majeure also extends to those impossibilities caused by human acts as well.2 Human acts, as distinguished from acts of God, include governmental actions, acts of war, economic downturn, and terrorism.
In California, the test for determining if performance can be excused based on a force majeure event is “whether under the particular circumstances there is such an insuperable interference occurring without the parties’ intervention as could not have been prevented by prudence, diligence and care.”3
A force majeure clause is not intended to buffer a party against the normal risks of a contract, and a court will not interpret a force majeure clause to excuse a party from the consequences of a risk that it expressly assumed if it would nullify a central term of the contract.4
In California, a party seeking to invoke a force majeure clause has to show “that in spite of skill, diligence and good faith on his part, performance became impossible or unreasonably expensive.”5 In fact, just because performance of a contract obligation will be more costly than anticipated, it will not be excused by a force majeure provision unless there “exists extreme and unreasonable difficulty, expense, injury or loss involved.”6
In addition, unless a contract explicitly identifies an event as force majeure, the event must be unforeseeable at the time of contracting to qualify as such.7 Absent agreement to the contrary, responsibility for reasonably foreseeable force majeure delays generally falls on the party responsible for performing the work.8
Furthermore, the nonperforming party has the burden to prove impossibility of performance under a force majeure clause.9 If there is substantial evidence in the record that a force majeure clause does not excuse performance, a court will find the nonperforming party in breach of the contract.10 In addition, to constitute a force majeure, a qualifying event must be the proximate cause of nonperformance of the contract.11
In other words, a force majeure is not a get-out-of-jail-free ard that can be used for every act of God or other unforeseeable event to excuse performance, and it will not automatically excuse performance because of COVID-19 or the Safer at Home Order. If you are a lessor, the provision may not protect you if you fail to perform the duties and obligations owed under the lease terms (e.g., making premises available, providing for utilities, etc.). For a lessee, despite the unprecedented and outrageous nature of our current circumstances, you may not be excused from your rent payment obligations or other duties owed under the lease terms.
Whether you are a lessor or lessee, and whether you are trying to determine if your or the other party’s performance is excused under the force majeure provision (or other defense), the first thing to figure out is whether the force majeure provision in your lease excuses the specific performance that concerns you. Assuming such a provision exists in your agreement, consider the following questions:
Note that California courts have scrutinized the language of force majeure provisions and generally require that they excuse performance by a party only if the terms unambiguously excuse the specific performance at issue. In Vanguard Integrity Professionals, Inc. v. Team Gordon, Inc.,12 for example, the plaintiff tried to cancel its sponsorship obligations for an international off-road race due to terrorist threats. The contract allowed the plaintiff to terminate if the defendant failed to perform any of the material obligations without cure. The contract specifically assigned the risk of loss to the defendant if it failed or refused to provide a race vehicle for three races for any reason, whether or not due to factors within or beyond the defendant’s reasonable control. The race was cancelled due to a terrorist risk. Because the force majeure language did not clearly state that the defendant assumed the risk of race cancellation due to an event like a terrorist threat, the court found that the defendant was not in breach even though the race was cancelled due to factors beyond defendant’s control. Accordingly, given the ambiguity, there was a triable issue on the applicability of the force majeure provision.
If a force majeure provision is broadly worded, a court may also find that it could possibly cover an event that prevents performance. In Rio Properties v. Armstrong Hirsch Hackoway Tyerman & Wertheimer,13 for example, the force majeure provision broadly stated that it applied if “any party’s performance became impossible by any  cause” (except for any cause that either party had knowledge of). The court found that Rod Stewart’s performance could be considered impossible due to his illness, even though the contract did not explicitly identify that as a force majeure event.
Take a close look at your force majeure provision because this is the first place the courts look to determine whether performance under your lease is excused. Is it possible that the language would excuse performance under the lease due to the COVID-19 or the Safer at Home Order? Or is the language so ambiguous and/or overbroad as to potentially include it as a force majeure event?
As for events that may or may not qualify as force majeure events, there is no California case law that addresses a situation even remotely similar to the COVID-19 pandemic. The closest events that could be applicable here are those involving world wars or governmental actions that prevent performance. Given that commercial leases vary greatly as to types of properties, uses, and contract language, it is important to understand the existing legal authority interpreting force majeure.
The following events have been held to be force majeure events that excused performance:
The following events have not been sufficient force majeure events to excuse performance:
In addition to the force majeure provisions in your lease, the principles of impossibility, impracticability, and frustration of purpose can also come into play and excuse performance for parties to a lease.
Like a force majeure provision, these doctrines can be used to excuse performance; however, they, too, have their limitations.
General Case Law
Impossibility excuses performance when it has literally become impossible. In Collins Hotel Co. v. Collins,30 for example, a building height ordinance prevented the builder from building the promised hotel, which would have exceeded the height limits.31
Alternatively, if there are increased costs associated with performance or one that could have been reasonably anticipated, the doctrine of impossibility will not apply.32
Case Law That Might Provide Guidance for COVID-19 Situations
Lessors and lessees of commercial real estate should pay particular attention to the following decision which, while old, may provide guidance to courts in dealing with the issues and claims arising out of the COVID-19 situation and Safer at Home Order.
In Mitchell v. Ceazan Tires, Ltd.,33 the California Supreme Court did not invalidate a lease by commercial frustration where the United States’ involvement in a war was imminent and the federal government imposed a war time restriction on the sale of new automobile tires. The lessee had rented space in a building for the purpose of operating a tire wholesale outlet store, and the court held that the value of the lease was not completely destroyed. The lessee was still free to operate a business related to the sale of tires or sublease the premises.34
If courts follow this ruling in response to attempts to excuse performance as a result of COVID-19 or the Safer at Home Order, it is possible that if leased premises can still operate as an essential service, there may be little relief.
Thus, similar to force majeure authority, the doctrines of impossibility, impracticability, and frustration of purpose are fact-specific and dependent on the language of the lease.
Examine the Lease’s Language
Whether the COVID-19 pandemic or the Safer at Home Order constitute a qualified force majeure event under your lease will depend, in large part, on the language of your lease. Does the force majeure provision:
Ask These Questions about Actions You Can Take
You will still need to take all measures within your reasonable control to perform under the lease. Whether you are a lessor or lessee, consider what you can still perform. Consider the following questions:
Considering these facts along with the Safer at Home Order and specific city or county level ordinances is essential to determine whether performance will be excused. Putting aside the possibility that the legislature may provide relief, the legal authority suggests that courts conduct a case-by-case analysis to determine whether performance has been excused.
Consider the Possible Long-Term Implications of COVID-19
Given the amount of uncertainty that surrounds the duration of the Safer at Home Order and the continued spread and duration of COVID-19, it is difficult to predict the long-lasting impact for commercial real estate. Options and issues that lessors and lessees should consider and address include:
Whether you are a lessor or a lessee (or their counsel), navigating the legal complexities and unknowns surrounding COVID-19 can seem daunting, and new case law will certainly arise during this unbelievable time. The considerations discussed above should, however, give you a foundation and understanding of how force majeure and the related doctrines of impossibility, impracticability, and frustration of purpose will impact performance of commercial real estate leases in California.
Deborah Yoon Jones is a partner in the Litigation and Trial Practice Group of the Los Angeles office of Alston & Bird. She assists business clients with a wide variety of commercial issues involving contract, consumer protection, unfair competition/business practices, real estate, franchise, labor & employment, financial services, and product liability matters in both state and federal courts throughout California. She is Alston’s Mentoring Partner who is responsible for the firm-wide mentoring program and has co-chaired the Women’s Initiative and Los Angeles Diversity Committee. She was recently awarded the honor of being named one of the Los Angeles Business Journal’s “Most Influential Women Lawyers” for 2019.
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1. Safer at Home Order for Control of COVID-19 (Safer at Home Order), Executive Order N-33-20 (March 21, 2020). 2. Mathes v. Long Beach, 121 Cal. App. 2d 473 (1953); see also Emelianenko v. Affliction Clothing, 2011 U.S. Dist. LEXIS 165598 (C.D. Cal. July 28, 2011). 3. Horsemen’s Benevolent & Protective Assn. v. Valley Racing Assn., 4 Cal. App. 4th 1538, 1564–65 (1992); see Pacific Vegetable Oil Corp. v. C. S. T., Ltd., 29 Cal. 2d 228, 238 (1946). 4. Horsemen’s Benevolent & Protective Assn., 4 Cal. App. 4th at 1565. 5. Oosten v. Hay Haulers Dairy Employees & Helpers Union, 45 Cal. 2d 784 (1955) (buyer refused to accept seller’s milk because buyer’s employees threatened to go on strike if they had to handle milk; however threatened strike did not render performance impossible under the force majeure clause); see also Jin Rui Group, Inc. v. Societe Kamel Bekdache & Fils S.A.L., 621 Fed. App’x 511 (9th Cir. 2015) (force majeure clause did not excuse plaintiff from performing contract even though contract excused it from non-delivery “arising from any event beyond its reasonable control” where plaintiff promised to deliver paper to defendant without securing assurance from third-party supplier); and Nissho-Iwai Co., Ltd. V. Occidental Crude Sales, Inc., 729 F.2d 1530, 1540–42 (5th Cir. 1984) (noting California law reads into force majeure provisions a good faith requirement that the party invoking the defense did not cause the excusing event and took diligent and reasonable steps to ensure performance). 6. Butler v. Nepple, 54 Cal. 2d 589, 599 (1960). 7. Watson Labs. Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099, 1111 (C.D. Cal. 2011) (FDA shut down of plant was foreseeable and thus not a force majeure event excusing performance); Free Range Content, Inc. v. Google, Inc., 2016 U.S. Dist. LEXIS 64365 (N.D. Cal. May 13, 2016) (given that burden was explicitly placed on the plaintiff and did not identify the invalid activity as a qualifying force majeure event, performance was not excused). 8. McCulloch v. Liguori, 88 Cal. App. 2d 366, 372 (1948). 9. Butler, 54 Cal. 2d 598 (1960). 10. Warner Bros. Pictures, Inc. v. Bumgarner, 197 Cal. App. 2d 331 (1961). 11. Hong Kong Islands Line America S.A. v. Distribution Servs. Ltd., 795 F. Supp. 983, 989 (C.D. Cal. 1991). 12. 2008 U.S. Dist. LEXIS 127188 (C.D. Cal. Nov. 10, 2008). 13. 94 F. App’x 519 (9th Cir. 2004). 14. 29 Cal. 2d 228, 238 (1946). 15. 94 F. App’x 519. 16. 56 Cal. App. 507 (1922). 17. 719 F.2d 992 (9th Cir. 1984). 18. 160 Cal. App. 2d 456 (1958). 19. 65 Cal. App. 4th 401 (1998). 20. 45 Cal. 2d 784 (1955). 21. 54 Cal. 2d 589 (1960). 22. 197 Cal. App. 2d 331 (1960). 23. 54 Cal. 2d 589 (1960). 24. 4 Cal. App. 4th 1564-65 (1992). 25. 795 F. Supp. 989 (C.D. Cal. 1991). 26. 65 Cal. App. 4th 401 (1998). 27. 2010 Cal. App. Unpub. LEXIS 6194, at *44–45 (Aug. 3, 2010). 28. 2011 U.S. Dist. LEXIS 165598. 29. See also Cal. Civ. Code § 1441 (holding that a contract that is impossible or unlawful to fulfill is void); Cal. Civ. Code § 1596 (the object of a contract must be lawful when the contract is made and possible and ascertainable by the time the contract is to be performed). 30. 4 Cal. App. 379 (1906). 31. See also Dairy Food Store, Inc. v. Alpert, 116 Cal. App. 670 (1931) (street widening prevented erection of building with certain frontage dimensions because it became impossible to do); Miranda v. Williams, 2008 Cal. App. Unpub. LEXIS 9239 (Oct. 21, 2008) (city refused to issue permit to build house and builder excused from performance). 32. See Kennedy v. Reece, 225 Cal. App. 2d 717, 724–25 (1964); Ellison v. City of San Buenaventura, 48 Cal. App. 3d 952, 962 (1975) (If a governmental act or law makes the performance either more expensive or unprofitable but still possible, then performance will also not be excused). See McCulloch v. Liguori, 88 Cal. App. 2d 366 (1948) (delay in construction caused by government regulations was reasonably foreseeable and did not excuse performance); Connick v. Teachers Ins. & Annuity Assoc., 784 F. 2d 1018 (9th Cir. 1986) (retired employee could not get lump sum payment because IRS code change did not constitute changed circumstances to justify voiding the contract). 33. 25 Cal. 2d 45 (1944). 34. See also Rose v. Long, 128 Cal. App. 2d 824 (1954) (even though county building department posted notice that building was unsafe for occupancy, lessee still required to pay rent because lessee could have taken steps to test right to occupy building, did not make any repairs before abandoning property, and did not wait to see whether the proposed ban on use would be enforced).