United States: Latest Decisions On Force Majeure In The COVID-19 Context

As discussed in previous updates (which you can read here and here), COVID-19 has brought the concept of force majeure to the forefront across multiple practice areas. As the pandemic-caused shutdowns began, scholars and businesses alike re-examined the application of the doctrine in various contexts, hoping to understand how, and if, the doctrine would apply to contractual relationships affected by the pandemic. The courts continue to shape the application of force majeure during the pandemic. Two recent decisions, summarized below, signal how some courts are interpreting the doctrine in the commercial litigation context. These recent decisions particularly highlight how courts may expect parties to plead the doctrine; whether any court will excuse the nonpayment of rent for a business based on governmental regulations; and whether businesses who attempt to render payment to some degree under the circumstances may be looked upon more favorably.

Palm Springs Mile Associates, Ltd. V. Kirkland's Stores, Inc.

In Palm Springs Mile Associates, Ltd. V. Kirkland's Stores, Inc.¹, a landlord of a shopping center brought an action against a commercial tenant alleging that the tenant breached its lease by failing to pay rent and other charges beginning in April 2020 and continuing thereafter. The lease included a force majeure provision which provided in relevant part that "[w]henever a period of time is prescribed in this Lease for action to be taken by either party, such party will not be liable or responsible for, and there will be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the reasonable control of such party."² The commercial tenant asserted that, starting in April, they were excused from paying rent due to governmental restrictions imposed as a result of the pandemic.³ In response the landlord commenced the action demanding full payment and further seeking acceleration of rent for the remainder of the lease, as well as attorney's fees, which totaled more than $466,000.⁴

The court denied the tenant's motion to dismiss, finding the commercial tenant's argument that it was automatically excused from paying rent due to the governmental restrictions on business operations and non-essential activities to be "unavailing."⁵ The court focused on the commercial tenant's failure to demonstrate a clear, causal relationship between the governmental restrictions and its inability to pay rent, noting that "[t]he restrictions on non-essential activities and business operations must directly affect Kirkland's ability to pay rent."⁶ The court also held that force majeure is effectively an affirmative defense, which would not support a motion to dismiss unless it was clear on the face of the complaint.⁷

This decision is consistent with some pre-pandemic decisions (such as those described here), which require a direct, causal connection between the claimed force majeure event and the tenant's inability to perform. Courts following this approach hold that it is not enough for the force majeure event to indirectly hinder the tenant's ability to perform: the force majeure event must directly prevent the tenant from performing.

Richards Clearview, LLC. v. Bed Bath & Beyond, Inc.

In Richards Clearview, LLC. v. Bed Bath & Beyond, Inc.⁸, a commercial landlord of a shopping mall brought an action seeking eviction against a retail tenant for failure to pay rent pursuant to the terms of the lease. The lease contained a force majeure clause, "under which the failure to perform an act required by the Lease may be excused for the period of the delay in the event that performance is hindered by 'strikes, failures of power, riots, insurrection, war, earthquake, hurricane or tornado... or other reasons of a like nature which are beyond the reasonable control of the party.'"⁹ The tenant, citing the governor's regulation of businesses in malls that it argued required closure of the store in question, had only tendered a partial rent payment for April and not paid any rent at all for May. It had, however, requested a temporary reduction in rent, late fees, and interest, based on the governmental closures.¹⁰ In addition, upon receiving a Notice of Default from the landlord, the tenant had attempted to pay the outstanding balance in full on three occasions to cure any potential breach under the lease, but the landlord refused to accept the payments.¹¹

In response to the landlord seeking an eviction on an expedited schedule, the tenant asserted multiple affirmative defenses including force majeure based on the governor's restrictions on commercial businesses in malls.¹² The court noted that the exterior access and outside entrance of the tenant's store, as well as tenant's status as a retailer of essential goods, actually rendered it exempt from the governmental regulations on businesses in malls.¹³ The court also reviewed key provisions in the tenant's lease that established circumstances under which alternative rent payments could be due, including when the mall was not occupied by two or more major retail tenants, but found those terms to be superseded by the fact that the tenant closed its store voluntarily.¹⁴

The court nonetheless found in the tenant's favor, and the tenant's attempt to submit the outstanding payment seemed to be a primary component of the decision.¹⁵ Citing to Louisiana's doctrine of "judicial control," wherein a court may decline to terminate a lease even where it may be justifiable, the court noted that the tenant had "a plausible basis for believing that [rent] was not due, and that even if [the tenant] was mistaken, it attempted to remedy the default...."¹⁶ Additionally, while the tenant had technically not followed the standard lease procedures for curing their default under the lease, the court held that "any deficiency in that regard is excusable by the global circumstances."¹⁷ Notably, while the force majeure clause did not explicitly include governmental regulations or restrictions as one of its enumerated events, the court applied it to the current COVID-19 pandemic regardless.

Takeaways:

These recent decisions signal to businesses that while courts remain open to considering force majeure as a defense to claims of breach of contractual obligations in the commercial context, some courts will require a strong causal connection between the claimed force majeure event and the litigant's failure to perform, and that courts may look more favorably on those who attempt to uphold their financial obligations even under current circumstances. As the concept of force majeure continues to evolve through court decisions, it is important to monitor the changing legal landscape as a result of COVID-19.

Footnotes

1 2020 WL 5411353 (S.D. Fla. September 9, 2020)

2 Id. at *2.

3 Id. at *1.

4 Id.

5 Id. at *2.

6 Id.

7 Id.

8 2020 WL 5229494 (E.D. La. September 2, 2020).

9 Id. at *3.

10 Id. at *1.

11 Id.

12 Id. at *2, 4, 6

13 Id. at *6.

14 Id.

15 Id. at *7-8.

16 Id.

17 Id. at *8.

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