In these difficult times, we are certain that you are focused on the health and safety of your families and employees. At the same time, we understand you are concerned about the devastating impact that restaurant or franchise unit closures due to COVID-19 will have on your business’s financial condition and your contractual obligations to landlords, vendors and lenders. This Client Alert discusses the rights you may have to suspend, postpone or modify your performance under your real estate leases due to what is commonly referred to as a “force majeure” clause.
Buried in the back of many contracts, including real estate leases, you may find provisions known as “force majeure” clauses that generally provide for relief to a landlord or tenant to the extent that their performance is materially and adversely affected by an event that constitutes “force majeure.” The more traditional events or circumstances that are thought of as “force majeure” events are floods, tornados, hurricanes or other so called “Acts of God.” It can certainly be argued, however, that a pandemic should likewise be treated as an event of “force majeure” which may, under certain circumstances, justify postponement of rental payments or excuse for performance under a real estate lease.
Language found in QSR leases varies greatly from lease to lease, and whether you can successfully prevail on a claim that you should be permitted to postpone or modify your payment obligations to your landlords will depend on the precise language set forth in each lease. In order to get your arms around this issue, our recommendations to our franchise clients are as follows:
- Review each lease agreement to identify those that have “force majeure” clauses or similar clauses that address the impact on a party’s obligations due to the occurrence of events beyond your reasonable control, such as fire, casualty, Acts of God or other events. Please note that not all leases will use the phrase “force majeure;” instead, there may be provisions that operate in the same manner, but use different terms such as “events beyond the parties control,” “Acts of God,” or similar terminology.
- Identify any language that appears to be specifically “on point” with respect to our current crisis. You may find that some more recent leases mention the impact to a party due to “epidemics,” “pandemics,” or “disease.” That is the most favorable language you might find, but the absence of these specific types of events does not necessarily mean you would not be entitled to some relief under our current circumstances.
- Pay close attention to any notice provisions or other procedural requirements you must follow in order to take advantage of the relief provided by these types of clauses. For example, we have seen a number of leases that require that a party intending to rely on the relief afforded by these provisions must provide its landlord with 10-15 days’ notice after the occurrence of the event constituting “force majeure.” If a party fails to provide timely notice, some of the provisions we have seen state that the rights will be deemed to have been waived.
- Please be aware that, even if you have provisions in your lease addressing “force majeure” or “events beyond your reasonable control,” such provisions will not automatically excuse performance on your part. Before performance is excused or can be postponed, you will likely need to be prepared to demonstrate that your financial position has been dramatically impacted by the event in question so that it is virtually impossible for you to make your lease payments in a timely manner. Please note that some courts have not granted relief under a “force majeure” clause if a party’s performance has merely been rendered impracticable or economically difficult. Therefore, we do not recommend unilaterally withholding rent payments before carefully reviewing the specific terms of your lease and seeking advice on its legal implications.
Leases and other contracts with vendors or lenders may contain “force majeure” or other similar provisions that will support your claim to postpone or modify your performance obligations to your landlords and other parties if your ability to perform has been severely impacted by the current crisis. In all events, we recommend that you review your leases and other material contracts carefully as soon as reasonably possible to make sure you preserve your rights to be able to take advantage of these types of provisions. This should help you avoid the risk of inadvertently waiving your rights to do so by waiting too long to bring up this issue to landlords or other contracting parties.