The Future of Commercial Leases post Covid-19 Pandemic: Force Majeure
11 September 2020
The Covid-19 pandemic has had a significant impact on many businesses. As tenants fall behind on rent payments and landlords are prevented from taking enforcement actions, business tenancies have been under scrutiny for their lack of provisions. We explore, in a series of articles, some of the clauses (and ideas) in commercial leases that will attract more attention during the lease negotiation stage in the future. In this first article, we will focus on Force Majeure and the legal principle of Frustration.
A Force Majeure clause is a contractual term that potentially allows a party to avoid liability for a breach of contract. This could arise if an event outside of one party's control prevented that same party from carrying out certain obligations under the contract. Unlike in other jurisdictions, contracts under English law do not imply a Force Majeure clause or concept. Therefore, for a party to rely on this, it must be expressly included. As with other express provisions in a contract, a Force Majeure clause will be negotiated and drafted by each party's lawyer. It is therefore specific to the parties' requirements and the nature of the contract.
While the use of a Force Majeure clause in commercial leases is uncommon, if not extremely rare, it is not impracticable to apply the concept. The challenge is balancing the provisions in a way acceptable to both parties. It is important to remember that a tenancy only provides the premises for the tenant's occupation. It does not guarantee the tenant will be able to operate its business on the premises.
What happens when a Force Majeure clause is triggered is dependent on the clause itself. A carefully drafted clause will state the effect of a Force Majeure event occurring. For a commercial lease, this can be a suspension of rent or other payment under the lease. The clause can also impose obligations on both parties to mitigate the situation, such as finding a replacement tenant.
The legal principle of Frustration enables a party to a contract to avoid certain obligations. A contract is treated as frustrated when an event outside the control of either party makes it impossible for contractual obligations to be performed. The Covid-19 pandemic is arguably such an event. However, it is difficult to rely on the doctrine of Frustration to end a commercial lease, which typically has a term of over five years. The lockdown is only temporary and does not alter the parties' position in the long run. To allow an event like the Covid-19 pandemic to frustrate a commercial lease would be unprecedented.
While Force Majeure and the law of Frustration are not as relevant in commercial leases, borrowing the concept to create or add new provisions into the lease is not a bad idea. The full scale of the economic damage caused by the pandemic is yet to be realised. However, many businesses will likely scale back their expansion plans or look to downsize their current space. Such activity could impact the property market by forcing landlords to accept more tenant-friendly terms.
If you would like any advice on your existing commercial lease, or on granting or taking a new one, please do not hesitate to contact our Commercial Property team.
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