Incorporating Lessons Learned

The spread of coronavirus (COVID-19) and responsive government measures to reduce the spread and curb the impact of the virus have led to unprecedented questions regarding the enforceability of contractual obligations. Many issues regarding non-performance remain unresolved. While we await resolutions, we look ahead to consider some of the lessons learned and how to incorporate these lessons into future contracts.

Reconsidering Force Majeure Provisions

Prior to COVID-19, force majeure provisions were often overlooked; however, as many legal commentators have noted, these provisions have become the center of many outstanding legal questions in the COVID-19 era. Force majeure clauses generally excuse a party’s nonperformance of certain obligations under the contract when an extraordinary event or circumstance occurs preventing the party from fulfilling its obligations under the contract. “Force majeure events” often include natural disasters, wars and labor strikes, and may include “catch-all” phrases such as “acts of God” or “other reason of like nature”. Force majeure clauses are traditionally interpreted narrowly. Commercial leases typically specifically exclude rent payment obligations from the obligations that are excused under a force majeure clause.  With respect to obligations to which force majeure clauses apply, force majeure clauses generally only delay, as opposed to permanently excuse, performance (e.g., lease obligations shall be excused for the period of delay, but not to exceed 90 days).

Looking ahead, at the very least, force majeure clauses should include phrases that encompass COVID-19 and similar impacts such as “pandemic,” “epidemic,” “public health crisis,” “state of emergency,” etc., instead of relying on the “catch-all” phrases to cover these impacts. Drafters should also consider whether to incorporate more sophisticated triggers which take into account economic hardships and outline if and when payment obligations will be excused. If the parties include economic hardships, they may consider the extent to which they must mitigate the impact of the force majeure event. For example, must a restaurant tenant remain open for take-out only in order to trigger their force majeure provision if indoor-dining is restricted? Further, parties may contemplate terms regarding whether obligations are temporarily suspended, whether time periods are extended until such restrictions are lifted or longer, or whether force majeure events allow termination of the contract.

Other Common Provisions

In addition to force majeure provisions, contracting parties may consider incorporating or reworking the following provisions:

• Change in Law Clauses – Many contracts, particularly construction contracts, include provisions offsetting the loss or damage faced by a contracting party in the event applicable law changes. Contracting parties may consider further defining the “changes” triggering the clause, including, for example, whether temporary government orders in response to a public health crisis results in such a trigger.
• Disruption Clauses – Contracting parties should consider whether to address disruptions to supply chains, labor force and/or access to financing directly or indirectly caused by temporary governmental restrictions.
• Pre-contractual Work – Many commercial leases include provisions regarding landlord’s and/or tenant’s work prior to commencement of the lease. Parties may consider how unexpected restrictions, labor or material shortages impact when an impacted party is required to complete the work.
• Operations Clauses – Many lease agreements include continuous operation clauses requiring the tenant to continuously operate or remain open during certain days or hours of the week. Landlords and tenants may consider how temporary government restrictions impact such requirements.

If you have any questions about this information and your contractual relationships, please contact one of the attorneys in Montgomery Purdue’s real estate practice group, including Joshua Pope or Stephanie Gero Dahlstrom.