Drive majeure clauses in post-pandemic leases – the journal file

Zach Allen

A power majeure clause (FMC) is often present in industrial leases. Its identify being translated from French as “power majeure”, this clause goals to excuse delays in execution attributable to unexpected circumstances.

In observe, not less than till just lately, most landlords and tenants have seldom had the chance to invoke power majeure. Possibly an occasional climate delay. Thus, events and even their legal professionals had been usually responsible of paying little consideration to CMEs, dismissing them as a type of “catch-all” provisions that gather mud behind the lease.

These days are over. In the course of the COVID-19 pandemic, we’ve got witnessed authorities orders nationwide which have immediately mandated or not directly precipitated short-term enterprise closures on an unprecedented scale. For the massive share of companies that rented out their properties, the closures naturally hampered their means to pay lease. This was a brand new state of affairs, and each landlords and tenants revisited their leases to see how the phrases – particularly CME, if there was one – suited their state of affairs.

Over the previous yr, I’ve reviewed many CMEs as regards to this situation. Whereas hardly any had been written with this pandemic situation in thoughts, I’d say their interpretation and software was fairly constant. On the one hand, these FMCs usually exonerate a tenant from any obligation to stay open. However, they typically didn’t entitle tenants to lease aid. The truth is, it’s fairly frequent for CFS to expressly exclude financial obligations (corresponding to lease) from the appliance of the clause.

If you’re a home-owner, you want this end result. If you’re a tenant, not a lot. Given our expertise with COVID-19 and the worrying thought that it may occur once more, homeowners are contemplating updating their FMCs to extra immediately handle future pandemic situations (naturally, in favor of the proprietor). On the flip facet, tenants are more likely to take a better take a look at FMCs and look to shift extra of the danger of a future pandemic to the owner.

For tenants with bargaining leverage, bottlenecks could embrace choosing authorities cease orders for particular therapy, full or partial lease discount, and even lease termination rights. Time will inform if and to what extent these changes can be thought-about “market”. Throughout this time, homeowners and tenants ought to plan to pay shut consideration to the way forward for their FMCs.

Zach Allen is a lawyer at Crowe & Dunlevy, crowedunlevy.comand member of the Actual Property Apply Group.

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