Coronavirus and the Applicability of Force Majeure

In response to the COVID-19 pandemic, several state and local governments have implemented “shelter-in-place” orders and mandated the closing of all non-essential businesses. The government’s necessary efforts to contain and slow the spread of the virus have and continue to affect the ability of businesses to operate and generate revenue.

In light of the current governmental actions, many commercial tenants are wondering if COVID-19 is an event of force majeure that would reduce or excuse rent payments due under their lease. This will depend on the express language of the force majeure clause in the tenant’s lease, if any. Case law suggests that courts are unwilling to depart from the express terms of the force majeure clause. Hydrocarbon Mgmnt., Inc. v. Tracker Exploration, Inc., 861 S.W.2d 427, 436 (Tex. App.—Amarillo 1993, no writ) (stating that “lease terms are controlling regarding force majeure, and common law rules merely fill in gaps left by the lease.”) (italics in original); Texas City Ref, Inc. v. Conoco, Inc., 767 S.W.2d 183, 186 (Tex. App.—Houston [14th Dist.] 1989, writ denied) (“… when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.”); Perlman v. Pioneer Ltd. P’ship, 918 F.2d 1244, 1248 n.5 (5th Cir. 1990) (Court viewed the concept as “not a fixed rule of law that regulates the content of all force majeure clauses, but instead [as] a term that describes a particular type of event… which may excuse performance….”). Typically, leases are drafted such that any payments required thereunder are not excused in the event of force majeure. So, even though COVID-19 may be considered an event of force majeure, if the force majeure clause is drafted so as not to apply to payments of rent or other monetary obligations, then the tenant cannot invoke force majeure as a reason for non-payment.

If the force majeure clause does not expressly exclude rent payments from the obligations suspended due to an event of force majeure, an argument can be made that force majeure may apply to the obligation to pay rent in the context of the COVID-19 situation. Currently, case law does not provide much guidance for situations where the force majeure clause does not explicitly exclude rent payments. Although this leaves room for tenants to make an argument that the payment of rent is a substantial obligation and thus should be suspended or reduced due to the COVID-19 pandemic, such arguments would likely be of first impression to the Courts.

It is important to note that, even if the payment of rent is deferred or suspended under the terms of the force majeure clause, once the force majeure event ceases to exist, the deferred or suspended rent would become due and payable. Most force majeure clauses merely extend the time to perform rather than fully relieve the tenant from liability.

Coronavirus and the Applicability of Common Law Principles of Commercial Impracticability and Frustration of Purpose

Many tenants ask if there is rent relief outside of their commercial lease and force majeure clause. As to most legal questions, the answer is “possibly.”

Under common law, the Courts have recognized principals of impracticability and frustration of purpose. Impracticability (also known as impossibility) excuses contract performance when a party’s performance is made impossible, without fault by such party, by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made. Samson Expl., LLC v. T.S. Reed Properties, Inc., 521 S.W.3d 766 (Tex. 2017). FP Stores, Inc. v. Tramontina US, Inc., 513 S.W.3d 684 (Tex. App.—Hous. [1st Dist.] 2016). Under this common law principle of frustration, a party may be excused from performing its obligation under a contract when a party’s principal purpose is substantially frustrated without such party’s fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made. Restatement (Second) Of Contracts § 265; §7.14. Frustration, 49 Tex. Prac., Contract Law § 7.14

A governmental regulation or order that makes impracticable the performance of a duty is an event the non-occurrence of which was made a basic assumption on which the contract was made. Hewitt v. Biscaro, 353 S.W.3d 304 (Tex. App.—Dallas 2011). The National COVID-19 pandemic, declared by the Federal government, would likely classify as an event warranting an application of either or both principals. With that said, a pandemic would be a case of first impression for the Texas courts, and thus it is impossible to predict the outcome.

Recommendation

We have been approached by both landlords and tenants seeking advice and guidance during this difficult time and have successfully worked with both in reaching a mutually acceptable resolution. We recommend that tenants approach their landlords to explore various rent deferral options. We also encourage landlords to work with their tenants on rent deferral arrangements with the rent recovery in the months following the deferral period. If tenants and landlords can work together to find a solution to get through these unprecedented times, it will be mutually beneficial in the long term.