The social and economic impacts of COVID-19 have been sudden, pervasive and severe. With executive action by New York State’s Governor forcing many companies across varied industries to close their business locations and/or suspend operations, the contractual provisions and common law remedies governing the relationships between commercial landlords and tenants have become a matter of immediate and acute concern.
Commercial landlords and tenants should examine their leases and insurance policies to understand their respective duties and obligations in light of the acknowledged COVID-19 pandemic and the Governor’s most recent Executive Orders – including the immediate 100% non-essential in-person workforce reduction and the stay of any eviction enforcement until June 20, 2020. This article will discuss briefly some of the various concepts (contractual, statutory and common law) that have and will continue to arise in the current economic and health crisis.
Commercial leases between relatively sophisticated landlords and tenants will typically include a force majeure clause in order to allocate the risk of events beyond the control of the parties and excuse a party’s performance as a result of such an event. While this clause is generally found in most commercial leases, in light of recent events, it has received ever greater importance and scrutiny.
New York courts generally narrowly construe force majeure clauses in commercial contracts and limit their scope, application and treatment to the events expressly stated therein by reasoning that the parties to a contract have fully negotiated such terms. Further, New York courts do not give general terms expansive meaning; instead, the inclusion of catch-all phrases like “including, but not limited to” or “other similar clauses beyond the control of the parties” will be limited to events similar in nature to those expressly stated.
Both landlords and tenants should closely examine the force majeure provisions in all of their existing lease agreements to determine whether and to what extent they contemplate excusal of performance due to epidemic, pandemic, or prohibition of business operations by civil authority. As part of the lease examination focus should be placed on four main elements:
- From what obligations are the affected party excused?
- Definition of the covered force majeure events
- Obligations of the affected party
- The parties’ remedies.
A brief comment on each of the four elements above: 1) often the force majeure clause does not excuse the party from making rent payments during the period of force majeure – this is anticipated to be a hotly contested matter and the issue will be whether, in light of the current pandemic a court (or the legislature) will find such provision either unconscionable or void as against public policy (e.g. see enactment of RPL Section 235-h in response to 159 MP Corp. v Redbridge Bedford, 33 N.Y.353 (2019); U.C.C. Section 2A-108); 2) is the definition of a force majeure event-specific or general – does it include pandemics; 3) does the affected party have an obligation to put the non-affected party on notice as a pre-condition to the claim of force majeure; 4) what is the remedy – would it be the tolling of a time period, voiding of the agreement? The parties should also review any contractual provisions that might require them to take any action to mitigate the other party’s damages in the event of one of the specified force majeure events.
Real Property Law Section 227
RPL’s Section 227, “[W]hen Tenant May Surrender Premises,” may be applicable where, by natural disaster or other causes not attributable to the acts or negligence of the tenant, the premises become unfit for occupancy. A commercial tenant may terminate a lease under these circumstances absent a provision to the contrary in the lease. Often a commercial lease will have a casualty provision which provides remedies distinct from the remedies set forth in RPL Section 227 and such section will explicitly reference that it applies in lieu of RPL Section 227. Under most commercial lease casualty provisions, if the premises are wholly unusable, there is a rent abatement until the premises can once again become usable.
Common Law Doctrines:
Impossibility of Performance/Impracticability/Frustration of Purpose
In addition to the provisions of a force majeure clause, parties to a commercial lease should explore the applicability of the common law doctrines of impossibility of performance, frustration of purpose and impracticability – all “judicial relatives” if you will. Impossibility of performance, similar to force majeure, is similarly limited in its scope and application by New York courts. In order to be excused, the performance of an obligation must be objectively impossible due to: 1) the destruction of either the subject matter or the means of performance of the contractual obligations or 2) by an unanticipated and unforeseeable event that could not have been guarded against in the contract. Impossibility or difficulty of performance occasioned only by financial difficulty or economic hardship will not excuse failure to perform on a contract.
Impracticability of performance, in some jurisdictions, may excuse performance where a party can demonstrate that the cost of compliance with a contractual provision is unreasonably excessive, demonstrably unanticipated and unforeseen. Frustration of purpose, similar to impracticability of performance, is also a highly fact-sensitive defense to an enforcement action but may be demonstrated in some instances where there was an intervening prohibition or prevention by law that was unforeseeable. Parties should consider whether Governor Cuomo’s recent Executive Orders will be determined to be the impetus for frustration of purpose claims in the bar and restaurant industry.
But for the unprecedented and unforeseen federal and state restrictions impacting businesses related to the coronavirus epidemic, only time will tell whether the courts will embrace these common law doctrines discussed.
Teaming and Communication:
Without regard to the parties’ respective rights and remedies under specific lease agreements and common law, landlords and tenants should explore all reasonable avenues to mitigate the economic effects of the coronavirus pandemic. Landlords should begin dialogues with their lenders to determine a reasonable path forward given the inevitable cash flows issues that will result from business difficulties faced by their tenants. Tenants should similarly keep landlords appraised of the state of affairs with respect to their businesses. Both parties should explore whether any government-sponsored disaster recovery resources might be available to mitigate cash flow shortages (see related Harris Beach Legal Alert for small businesses on this topic).
Both parties should also closely review any business interruption insurance policies carried with respect to their commercial leases. Additionally, parties should stay abreast of the various pieces of state and federal legislation related to economic relief from the coronavirus pandemic. Harris Beach is following all such legislation closely and updates may be found regularly at our Insights page, our COVID-19 response page or via any of the firm’s social media platforms.
Harris Beach’s commercial real estate and corporate attorneys are intimately familiar with these issues and remain connected and available to advise clients navigating these business threats.
This alert does not purport to be a substitute for advice of counsel on specific matters.
Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, Melville, New York City, Rochester, Saratoga Springs, Syracuse, Uniondale and White Plains, as well as New Haven, Connecticut and Newark, New Jersey