As a result of the continuing coronavirus pandemic more commonly referred to as COVID-19, nearly a dozen county public health departments across California including seven counties in the San Francisco Bay Area have issued a shelter-in-place order (“Order” or “Orders”) lasting through at least April 7, 2020. While local governments are taking drastic efforts to save lives, the same efforts area heavily impacting businesses’ abilities to profit and even remain in existence.
With the continuing threat of COVID-19, the Orders, which could conceivably be extended, and the many possible outcomes businesses could face, several owners are weighing whether to close their operations indefinitely. A key consideration when thinking about closing shop permanently is the amount of liability a business may face if they terminate their lease with a landlord.
The first step in this analysis is to assess whether the lease has a force majeure clause and whether that clause can be deployed. A force majeure clause allocates risk by accounting for a variety of unpredictable scenarios any of which could prevent any party under the contract from performing. If any one of those scenarios happens, then a party can deploy this clause to terminate the lease or terminate their performance under the contract. For example, a force majeure clause in a lease may provide as follows:
Neither Landlord or Tenant shall be liable for any delays due to strikes, revolutions, riots, lockouts or any other labor disputes or disturbances of third parties unrelated to Landlord or Tenant, acts of God, shortages of labor or materials, inclement weather, war, governmental laws, regulations or restrictions, or any other cause of any kind whatsoever which are beyond the reasonable control of such party.
But not every lease contains a force majeure clause, and not every force majeure clause contains a catchall portion. The specific language of the clause matters greatly!
The tenant operating under one of the Orders who wants to cease operations and therefore cancel their lease has at least two ways to argue that the force majeure clause above has been triggered:
While the intent of deploying a force majeure clause is to terminate the contract outright, a landlord might put up a fight. If the landlord seeks court intervention, California courts will assess whether the clause applies on a case-by-case basis. To avoid the expense of litigation, tenants should consider a two-step process: deploying the force majeure clause to terminate the lease and negotiating a buy-out of their lease with the landlord. For example, if a tenant is in year seven of a ten-year lease with $300,000 left to pay in rent (not counting common area maintenance and other related fees), offer the landlord $100,000 to smooth things over and negotiate from there. Another option is to sublet or assign the unit to another party.
None of this matters if you do not otherwise follow the provisions of the lease, not the least of which is to properly provide the landlord notice of a tenant’s intent to deploy the force majeure clause and terminate the lease.
If you are considering ceasing operations, Garcia & Gurney is here to assist you in this complex analysis. We can be reached at (925) 468-0400 or by using our online contact form.
Disclaimer: The contents of this article should not be construed as legal advice. This article is not an exhaustive list of issues that may arise in the operations of a business. Businesses should seek the assistance of an attorney who will analyze multiple factors unique to each kind and size of business.