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Commercial tenants and landlords and COVID-19

My experience during COVID-19 drew upon two “laws” I learned early in my law career: what’s legal isn’t always fair and contracts are as good as the parties who sign it. Why am I telling you this?

Because COVID-19 showed me that, notwithstanding one’s legal rights, landlords and tenants can co-operate, especially since their survival was interdependent. This is especially true during the height of COVID-19, as replacing a tenant or moving to a better location simply wasn’t an option.  As such, if you find that you do not have the ability to suspend rent payment by invoking a contractual right or terminating the lease due to a common law principle, not all is lost. While the law may not be on your side, the economic reality of interdependence is.

Generally, there are two ways tenants may find relief from their contractual obligations – one under the force majeure clause and the other under frustrated contract principle.

Force majeure “rights” are derived from your contract and this right allows you to not perform a covenant under the contract because of circumstances that are beyond your control. This right doesn’t exist unless it’s in your contract and the nature of the right – that is, what obligations you don’t have to perform – depends on the language of the force majeure clause.

There are two types of force majeure clauses – specific and general.

The general type of clause typically states that a party will not be liable for failure to perform a covenant/contractual obligation due to an event of “force majeure”. General clauses typically reference “Acts of God” and will not provide detail as to what a force majeure event happens to be; these clauses are likely to give rise to the most amount of litigation as enterprising lawyers will attempt to expand the definition “Acts of God” to include pandemics.

The second variety of force majeure clauses – a specific clause – is identifiable because of the exhaustive list of events that are defined as “force majeure” events. A robust specific clause suggests, according to case law and general contract law principles, that the parties have turned their minds to what a force majeure event could be and have specifically decided to include and exclude certain events. As such, if your specific clause does not include a pandemic, you may not have the ability to rely upon the force majeure clause to get out of performing a certain obligation, such as paying rent. Of course, attempts will be made to shove COVID-19 into other listed events, such as “government intervention” and I suspect that today’s more sympathetic courts may agree.

Assuming that COVID-19 qualifies as a force majeure event, you must understand which obligations you don’t have to perform due to the event. Most leases specifically exclude rent payments, meaning that even if COVID-19 is a force majeure event, you still have to pay rent. Let’s say, however, that your force majeure clause allows you to not pay rent, you still have to prove that COVID-19 makes it impossible, not just inconvenient, to pay rent. This means that if paying rent just hurts your bottom line but isn’t impossible, then the force majeure clause doesn’t apply and you have to pay rent.

In addition to proving impossibility, you have to prove that the pandemic, along with the consequences that have affected your ability to pay rent, were beyond reasonable foresight and your skill to foresee when you entered into the contract. For this reason, if there is anyone who’s entering into an agreement in today’s economic climate, it would be unreasonable to assume that they’d be able to rely upon the force majeure clause as the economic impact on one’s business is simply obvious. But wait, there’s more…

The courts do not look favourably upon a party to a contract who is leveraging a certain situation in order to get out of performing an obligation. In other words, you have to try and make arrangements to ensure that you can reduce the impact of the intervening/unforeseeable event on your inability to meet an obligation under your lease. This means that you’d have to figure out how to change your revenue streams, take advantage of all government programs and negotiate with the landlord before you can rely upon the clause.

Finally, these clauses typically have strict notice requirements. A phone call, text or email may not qualify as proper notice and the notice may have to be provided within a specific number of days after the event. Timelines, as many of us in this business know, are critical to pay attention to as failure to meet the notice obligations will likely bar your ability to rely upon the clause.

Tenants who did not have a force majeure clause then asked if they could rely upon the doctrine of “frustration”. This common law doctrine applies when a situation arises, the parties have no clause in their contract to address this situation and performance of the contract becomes “a thing radically different from that which was undertaken by the contract.”

Unfortunately, this concept is much more difficult to prove than showing that a force majeure clause should apply. This is because “it is not enough that the contract become more onerous, or even significantly more difficult, but still possible to perform”.  In other words, “a party must show that the original purpose of the contract has been frustrated, and it would be unjust for them to be bound to the contract under the existing circumstances”.

Since what you’ve contracted to do – pay rent – hasn’t changed completely due to COVID-19, I suspect that paying rent during these times may be unjust, but the law won’t give you relief. And this is why it’s important to sign contracts with parties who are reasonable and willing to work towards a common solution, regardless of what the law says.