As businesses throughout California prepare to reopen after “Shelter in Place” order restrictions loosen, there is a foreseeable expectation that not all businesses will be able to meet their lease obligations. No doubt the current Covid-19 worldwide pandemic provides for uncertain times for landlords and tenants. Neither landlord nor tenants can predict the future with certainty, but an examination of “Force Majeure” clauses (if they exist) is addressed herein.
What is “Force Majeure”?
Force Majeure is not a novel legal concept; rather it is a term that has existed for a very long period of time. Many people think of it as referring to an “Act of God” or when performance under a lease (or contract) becomes so impracticable or impossible it is excused. Force Majeure can apply whether man made or not. A force majeure clause is an application of the doctrine of impossibility or impracticability: performance of a contract is excused when an (1) unforeseeable event, (2) outside of the parties’ control, (3) renders performance impossible or impracticable. See Citizens of Humanity, LLC v. Caitac Int’l, Inc., 2010 WL 3007771, *14 (Cal. Ct. App. Aug. 3, 2010) (“‘Force majeure’ is the equivalent of the common law contract defense of impossibility.”) Further, “The test is whether under the particular circumstances there was such an insuperable interference occurring without the party’s intervention as could not have been prevented by the exercise of prudence, diligence and care.” See Pacific Vegetable Oil Corp. v. C.S.T., Ltd. 29 Cal.2d 228, 238 (1946).
What if the Lease Does Not Contain a Force Majeure Clause?
Just because the lease does not contain a Force Majeure clause, that should not be a cause of panic for either the landlord or tenant. California Civil Code section 1511 (titled, “Causes excusing performance”) acts as California’s default Force Majeure provision. The statute provides performance becomes excused “when such performance or offer is prevented or delayed by the act of the creditor, or by operation of law.”
The Lease Will Often Define What Events Constitute Force Majeure
Often, a lease will contain a Force Majeure clause that will control what events trigger Force Majeure; such as an earthquake, floods, fires, labor strikes, health epidemics. This lease term is used as a contractual defense to breach of lease/contract claims where performance is believed to be impossible. It is important to note, Force Majeure is not limited to only a contractual defense, and a party may file a Declaratory Relief action to determine contractual status in light of an alleged Force Majeure event.
A party can contract around the possible broad interpretations of Civil Code section 1511. The statute does state performance is excused “[w]hen it is prevented or delayed by an irresistible, superhuman cause…unless the parties have expressly agreed to the contrary.” (See California Civil Code section 1511(2) (emphasis added). Thus, the written contractual clause may provide a narrow or broad application of the doctrine. Without written contract terms in place, the defenses of impossibility and impracticability will apply, and the non-performing party will need to establish such to succeed.
How Will Force Majeure Clauses be Interpreted Now?
It is still uncertain when California will reopen fully and completely similar to life prior to Shelter in Place orders. It is difficult to foresee California Courts not determining that a tenant, unable to conduct its business for two, three, or maybe more months is subject to impossible circumstances, and Force Majeure applies. It is likely a Court will decide the coronavirus was not within a tenant’s control nor foreseeable so it could have made alternative plans. As of now, no California Court has ruled on the application of Force Majeure provisions in connection to Covid-19. If the lease does provide that health epidemics do not apply as Force Majeure, the express contract would seem to dictate under California law.
Since access to our courts is severely restricted right now, and there are moratoriums on eviction proceedings, this gap in court access should incentivize landlords and tenants to try and reach a resolution and avoid a court fight.
Force Majeure will likely be a popular and litigated topic in the foreseeable future. As landlords and tenants continue to be affected by Covid-19, the likelihood of Force Majeure claims will only increase.