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Florida Commercial Leases and the Effect of Force Majeure Clauses in the Era of COVID-19

Legal14

Our country is currently experiencing one of the most unprecedented events in modern history. Many businesses throughout the Country and the State are feeling the economic impacts as government regulations, aimed at curbing the spread of COVID-19, have made it difficult to continue normal operations, or have caused businesses to shut down indefinitely. This economic turmoil has business owners asking one common question “If my business is not making money, how will I be able to pay rent, without a breach of contract?” As such, some of these businesses are turning to their leases and to the law to find a solution that would relieve them of the contractual obligation to pay rent for their commercial leases. In many cases, these businesses may be correct but this area of the law can become confusing as there are different approaches depending on the circumstances. Most commonly, the different approaches may be in the form of a Force Majeure Clause within the lease agreement, or the common law doctrines of: (1) Impossibility (2) Impracticability, or (3) Frustration of Purpose. As every contact has an implied covenant of good faith and fair dealing, it is important to have a good understanding of how these concepts work, before taking action, in order to best protect your business. Below we will discuss the distinctions between these legal principles, the court’s approach, and what steps business owners should consider.

The Force Majeure Clause

Historically, Force Majeure Clauses have been included in many types of agreements, especially leases, to protect the contracting parties from events, outside of their control, that may render continuing obligations under the contract, harmful or moot. Prior to the pandemic though, these clauses never garnered much attention because of the limited and very specific events in which they are typically invoked. Because these clauses are becoming relevant on a large scale, it is perfect moment to discuss the intricacies.

Force Majeure Clauses are easy to spot in a lease as most are pretty standard, boilerplate language that usually begins under a section of the lease titled “Force Majeure.” Typically, the clause will lie dormant within the lease until one of the specified events occurs. The Force Majeure Clause will normally include a list of events such as: Earthquake, Hurricane, Other Acts of God, Loss of Power, Government Laws and Regulations, War, Insurrection, and even Pandemic. The remainder or the clause will convey the parties’ rights and responsibilities in respect to the event and the continuation or suspension of the agreement. Therefore, if a Force Majeure Clause is identified in your lease this is the starting point for determining your rights and may also be the ending point as you will later learn.

Common Law Doctrines

Force Majeure Clauses are certainly not the only avenue that business owners may utilize in the quest to obtain relief from rent payments that they cannot afford in the midst of this current health crisis. In fact, there is history of well-established common law principles that may be able to help in providing a potential basis for the non-payment of rent and defense to the subsequent breach of contract.

Impossibility. Impossibility as a defense to a breach of contact action normally involves the destruction of the subject matter of the agreement. For example, if the leased premises burnt down, this doctrine may provide the lessee a basis for not paying rent. 

Impracticability. Impracticability is in essence very similar to Impossibility in that it is just a lesser degree of Impossibility. Here, while performance under the agreement is not necessarily Impossible, the circumstances may be such that it may be in either, or both, parties’ best interests not to continue the agreement.

Frustration of Purpose. Frustration of Purpose is slightly different than the other two doctrines. Again, performance by either party may not be impossible but an intervening event occurs, outside of the parties’ control, which would substantially affect the purpose of the contract and the other party was aware of this purpose.

While these doctrines may appear similar in many ways and different in other ways, they are not mutually exclusive in that it is not too difficult to imagine a situation that may invoke more than one of them. However, it is also important to understand how courts apply these doctrines and how Force Majeure Clauses could affect their applicability.

The Courts

A Force Majeure Clause may create preclusive effects to the availability of the common law counterparts. Under Florida’s Parole Evidence Rule, Florida takes the “Four Corners” approach which effectively bars the admissibility evidence tending to show an intent that is contradictory or additional to the terms included within the four corners of the agreement. When dealing with a Force Majeure issue, courts examine the clause and will narrowly construe the meaning of the clause. This analysis is extremely fact based and will only allow relief to a party who has carefully and correctly claimed Force Majeure. In most cases, this means that the facts present must be clearly in line with at least one of the events specifically listed in the clause. In any case, the courts will give effect to the express provisions of the clause; no more, no less. Some clauses themselves may be more liberal, in that the Force Majeure events list may “not be limited to” the events listed. In other cases, the clause may explicitly state that the Force Majeure Clause “does not apply to the timely payment of rent.” If an agreement contains a Force Majeure Clause, courts will make a general determination that the parties took time to think of the conceivable events, list them, and that it is a conclusive list for the reasons of declaring Force Majeure, thereby, precluding the ability to use one of the common law doctrines which would potentially violate the parole evidence rule.

As such, the common law doctrines of Impossibility, Impracticability, and Frustration of Purpose are best utilized as a defense when the agreement is silent on Force Majeure. If an agreement lacks Force Majeure language, these common law doctrines act as a sort of default. In any case, there will be an intense analysis of the facts of the case before a court will decide whether any of these defenses are appropriate as applied to the facts. Such event that would warrant relief under these doctrines must not have been foreseeable to the parties. Furthermore, businesses claiming one of these defenses will not prevail solely because they are not financially able to perform their obligations under the contract. Finally, the party claiming these defenses has the burden of proving all issues under the defense.

What Can Businesses Do?

With a great amount of uncertainty as to what is to come in the near future, business owners, more than ever, are scrambling to figure out ways to fulfil their contractual obligations while doing everything possible to preserve their businesses. Commercial leases often offer a Force Majeure Clause as a pre-conceived solution to at least suspend the performance of some obligation. In the absence of such a clause, common law may also provide relief. It is important, however, that business owners that take these legal principles under careful consideration before simply stopping rent payments. First and foremost, business owners should discuss options and the facts of their case with their attorney. There should also be a dialogue between the contracting parties as other solutions may be agreeable, (e.g. a deferment period). This is important because of how narrowly the courts construe Force Majeure Clause and because of the strict application of the common law doctrines. If the facts of the case do not align perfectly to how the courts apply these legal principles, on top of an award for back rent, the court is likely to award additional damages under the breach of contract, which could result in a fatal blow to an already struggling business.

Sweeney Law, P.A. Has Vast Experience Litigating Complex Commercial Lease Matters

Brendan A. Sweeney, Esq., LL.M., of Sweeney Law, P.A., a boutique firm in Fort Lauderdale, Florida, regularly handles complex litigation concerning commercial lease matters throughout Florida. Brendan A. Sweeney, Esq., LL.M. is an AV Preeminent Martindale Rated Attorney, that has been recognized as a Florida Super Lawyer in 2020 and 2019, Florida Legal Elite in 2020 and 2019, and as a Florida Super Lawyer Rising Star in 2018, 2017, 2016, 2015, and 2014. If you have any questions and/or issues regarding commercial leases then contact Sweeney Law, P.A. at (954) 440-3993 immediately to protect your rights.

www.sweeneylawpa.com.

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