What Happens to Your Contractual Obligations When the Government Closes Your Business During a Pandemic?

In the midst of the coronavirus global pandemic, many state and local governments, for public safety reasons, have ordered the closure of businesses such as restaurants, gyms and fitness centers.  Not surprisingly, these businesses may wonder whether the forced closures excuse their obligations under their commercial lease.   As with many other legal issues, the discussion below illustrates that the answer to this question is “maybe.”   

Force Majeure Clauses

Many contracts, including commercial leases, include what is known as a force majeure clause.  For example, a lease may have a provision that contains language similar to this:

Neither party shall be liable for any costs or damages due to delay or nonperformance under this agreement arising out of any cause or event beyond such party’s control, including, without limitation, cessation of services hereunder or any damages resulting therefrom to the other party as a result of work stoppage, power or other mechanical failure, computer virus, natural disaster, governmental action, or communication disruption.

This type of language may be relied upon to assert that a party’s non-performance of its contractual obligations is excused when and if the extraordinary events set forth in the contract prevent that party from fulfilling those obligations.  In the case of a governmentally forced shutdown for public safety reasons during a global pandemic, an affected party, i.e., the tenant, might reasonably assert that they are excused from their obligation to pay rent and continuously operate their business by the force majeure provision in their lease.  This argument would be particularly effective if the provision specifically refers to the exact event, i.e, governmental action, that has made the tenant unable to fulfill those specific contractual obligations, i.e., payment of rent and the continuous operation of a business.     

Commercial Impracticability

In the absence of a force majeure provision, the doctrine of commercial impracticability may be asserted to support the discharge of certain contractual obligations during a government ordered shutdown of a business.  This doctrine applies after a contract has been executed when a party’s performance is made commercially impracticable through no fault of its own by an event, the non-occurrence of which was a basic assumption on which the contract was made.  Based upon this the occurrence of the event, the duty to render performance of certain contractual obligations is discharged.  In other words, an event that occurs after a contract is made constitutes an impediment to performance.  Such events typically include 1) the death or incapacity of a person necessary for performance of the contract, 2) the destruction of a thing necessary for performance of the contract or 3) prohibition or prevention by law.

In the current environment, a tenant could argue that their lease was based upon the non-occurrence of an event that would require them to cease operation of their business, i.e., a government shutdown during a pandemic for public health reasons.  The occurrence of this event, which happened through no fault of the tenant, would  render their performance of their obligations under the lease, including the obligation to continuously operate the business and pay rent, commercially impracticable.  It is the existence of this commercial impracticability that would arguably discharge these contractual obligations.   

What this all means is that businesses that have been affected by the government forced shutdown, including tenants and their landlords, should look to the terms of their lease agreements to determine if they contain any language that would excuse performance of certain contractual obligations under the unusual circumstances in which they find themselves.  Even if there is no contractual language excusing  performance, the doctrine of commercial impracticability may provide support for a discharge of certain contractual obligations for the duration of the shutdown.  It, therefore, behooves both parties to discuss and attempt to reach an amicable agreement as to how those obligations will be treated during the shutdown and thereafter.  Additionally, certain state and local governments have enacted emergency regulations that prevent parties from taking any punitive actions based upon a failure to perform contractual obligations during the pendency of the shutdown.  These regulations would need to be considered in any discussion and attempts to find a solution that is acceptable to both parties. 

The information presented here is for general educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship.