Due to the economic upheaval caused by the COVID-19 virus, tenants may be unwilling or unable to pay rent. Though we were doing well earlier this year, in the second quarter the economy declined by nearly a third, the worst on record. Whether you’re a tenant or property owner, if you’re facing COVID-19-related challenges, and want to learn about your rights and obligations under a commercial lease, give us a call.
COVID-19’s aftermath has the potential to upend commercial real estate for years to come. Many offices once filled with people are empty because everyone’s working at home. Many tenants have found they may be able to operate better, at lower costs, without an office. People are leaving cities for the suburbs, so if offices do re-open, there may be more demand there, less in urban areas. Most small businesses can’t afford a prolonged drop in income because they don’t have enough cash on hand to continue to pay bills and rent. What are tenants and owners of commercial real estate to do?
Legal defenses to breaking a lease
If your tenant has broken your lease, you think it will happen, or your’re the tenant with financial problems, here are some legal issues that can come into play if a commercial lease is broken, depending on the facts of your situation. They all have a similar theme: What happens if there’s an awful event impacting both parties to a contract?
Force Majeure
Force majeure is French for superior force. A commercial lease should have a force majeure clause.
The goal of the clause is to keep a contract viable when the parties, through no fault of their own, can’t perform their obligations due to events beyond their control. The parties agree that if certain circumstances happen and they’re acting in good faith, non-performance of contractual obligations will be excused, so the purpose of the contract won’t be frustrated.
Generally, these clauses cover events that:
- Can’t be controlled by the parties
- Cause a party to be unable to perform an obligation or a delay its performance
- Aren’t the party’s fault
- The party can’t reasonably be expected to prevent, avoid, or overcome by using reasonable efforts
These events usually are considered acts of God (they’re beyond human control) like extreme weather, riots, government or regulatory action, strikes, or terrorism. Depending on what the clause states, COVID-19 and subsequent, related government orders (like closing or limiting a business’ operation) could be a force majeure event. If you improperly declare a force majeure event, the other party could repudiate the contract and seek damages.
Impossibility and Impracticability
There are situations where one party’s performance is impossible or impractical due to intervening and unforeseeable events like a war or a catastrophic event. It would be unfair and inequitable to penalize a party for not performing their contractual duties if the conditions interfering with the performance are extraordinary and beyond their control.
California law states:
- The lack or delay of performance of an obligation of an offer of performance
- In whole or part
- Is excused if it’s prevented or delayed due to
- An irresistible, “superhuman” cause or by an act of a public enemy of California or the US
- Unless the parties have expressly agreed otherwise
Not living up to the contract would need to be extremely difficult and or expensive to justify this defense, but whether the circumstances justify it could be up to a judge or jury.
Commercial Frustration
California recognizes the commercial frustration defense when performance is possible, but the purpose of the agreement has been frustrated by circumstances that were not anticipated, so the value of performance is substantially destroyed.
The party claiming this defense must show:
- Both parties recognized the contract’s purpose
- The interrupting event couldn’t be reasonably foreseen
- The frustration is so severe it wasn’t an assumed risk under the contract
- The value of the performance to the party seeking to be excused must be substantially or totally destroyed
No matter your commercial lease dispute, we can help
Whether non-performance by a party to a commercial lease is excusable or not depends on the circumstances. A property owner could have multiple tenants claiming the same defense to breaching the lease and it’s valid for some but not others.
Like all legal disputes, the best resolution may be one that’s negotiated between the parties. This can avoid the costs of litigation and both sides can cut their losses. Call us today at (949) 244-4207, so we can talk about your situation, how California law may apply, and your best options for dealing with the problem.
