Co-Tenancy Clauses, COVID-19 and Force Majeure

Mar 25, 2020

By Serena Sayani | Related Practice: Real Estate

The spread of COVID-19 has caused a massive disruption to businesses across the United States. The guidance from the state and local governments to shut down many local businesses has landlords worried about financial viability of their retail assets. With operators being required to shut down their businesses, landlords are in danger of being in violation of their co-tenancy covenants under their retail leases. A co-tenancy covenant in a retail lease requires a landlord to provide a tenant with rent reductions or the right to terminate the lease if other specifically designated tenants of the shopping center or retail area stop operating, stop occupying their premises or if a percentage of the overall shopping center or retail area is vacant. Can a landlord rely on force majeure to discharge its obligations under a lease with respect to co-tenancy requirements?Office building

Force Majeure

The first question to ask is whether the lease contains a force majeure clause. Force majeure is the clause in a lease that excuses a party’s performance under the lease due to unforeseen circumstances, which would prevent such party from fulfilling their obligations thereunder.

If the lease includes a force majeure clause, then consider (1) whether the force majeure clause under the lease runs in favor of the landlord (or either party under the lease); and (2) the specific language of the force majeure clause under the lease. The force majeure clause will likely include a list of specific events that constitute an event of force majeure. From that list, the landlord will need to determine which specific event would apply. Also, the force majeure clause may include broad catch-all language such as “unforeseen circumstances” or “any event beyond a party’s reasonable control.”

However, it is important to note that the very nature of the co-tenancy covenant assumes that the landlord is willing to provide relief to the tenant regarding the performance and operation of other tenants’ businesses, which are beyond the landlord’s reasonable control. Under these circumstances, a broad force majeure clause may be deemed to “swallow” the co-tenancy requirement by frustrating the intent of the parties and cause the enforcement of co-tenancy clauses to be futile.

Notwithstanding the above, if the lease includes a force majeure clause that runs in favor of the landlord (or either party under the lease), and is broad enough to cover the current unforeseen circumstances, a landlord may be able to rely upon this clause to be excused from its obligations under the co-tenancy requirement. Ideally, the co-tenancy clause would include a specific carve-out from the landlord’s duty to satisfy the co-tenancy requirement for certain temporary closures under each specified tenant’s lease or a general carve-out for force majeure. However, even a general force majeure clause in the lease is intended to excuse a party that is impacted by an event of force majeure from performing its obligations under the lease and can be used by the landlord as a defense for its inability to perform its obligations under the co-tenancy requirement.

Notice Requirements

It is important to remember that when invoking the force majeure clause under the lease, the landlord must abide by any specific notice requirements in the lease pertaining to force majeure. In Washington (and other jurisdictions), the failure to properly follow the notice requirements under the force majeure clause may bar relief under the clause.

Usually, the co-tenancy requirement will require that the tenant under the lease (a) not be in default under the lease, and/or (b) continue to operate its business in the premises. Practically, if the condition for the tenant to operate its business in the premises is set forth in the lease, the tenant cannot claim that the landlord violated the co-tenancy covenant in the lease if the tenant is not operating its business in the premises due to its own claim of force majeure under these current circumstances.

If the lease does not contain a specific force majeure clause, the landlord may be able to rely on common law contract principles that may apply under these circumstances such as impossibility, impracticability, or frustration of purpose. Under the Restatement (Second) of Contracts §261 (1981), the general principle is that where a party’s performance is made impracticable or impossible by the occurrence or non-occurrence of an event, and the event was not caused by the party asserting such defense, then the party’s obligation to perform under the contract would be excused. A court may grant relief under this theory where a party, through no fault of their own, is unforeseeably unable to perform its duties under the contract as a result of a supervening event. However, it is important to note that in order for any supervening event to excuse a party’s performance, the non-occurrence of such supervening event must have been a “basic assumption” under the contract. These common law principles may apply to a landlord claiming relief from its obligations with respect to the co-tenancy covenants under the lease since (1) the occurrence of COVID-19 is an unforeseeable event that was not caused by the landlord, (2) it frustrates the landlord’s ability to perform its co-tenancy obligations under the lease, and (3) the non-occurrence of the pandemic disease and government mandated shutdown of businesses was a basic assumption under the lease.

If you have questions about your co-tenancy clause, or general questions about your lease, contact Serena Sayani or any member of the Stokes Lawrence Real Estate practice.