April 7, 2020
Many leases contain a force majeure clause which, traditionally, excused performance by the tenant due to extraordinary circumstances or an Act of God. Perhaps not surprisingly, the law is ambiguous as to the effect of a force majeure clause in the face of the current pandemic: in sum, does the pandemic permit invocation of the clause to excuse performance?
Below is a syllabus of the law from New York, New Jersey, and Pennsylvania. It is important to note, however, that not all force majeure causes are the same and the particular language of the clause will inform its viability.
New York law defines force majeure as a “clause excusing nonperformance due to circumstances beyond the control of the parties.” Kel Kim v. Central Mkts., 70 N.Y.2d 900, 902 (1987). The law governing force majeure clauses is based on the common law doctrine of impossibility of performance, which is “applied narrowly, due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances.” Kel Kim, 70 N.Y.2d at 902. The Court of Appeals in Kel Kim held that impossibility of performance only occurs “when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible” and “the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.” Id. The Appellate Division in Kolodin found that the impossibility of performance doctrine “is generally limited to the destruction of the means of performance by an act of God, vis major, or by law.” Kolodin v. Valenti, 115 A.D.3d 197, 200 (1st Dept. 2014).
The Kel Kim holding presents a potential issue in evaluating force majeure clauses, in that the Court of Appeals held that ordinarily a party’s performance only will be excused if the force majeure clause specifically included the event at issue. Kel Kim, 70 N.Y.2d at 902-903. The Appellate Division provided further analysis on this issue in Constellation Energy Services, finding:
Force majeure clauses are to be interpreted in accord with their purpose, which is to limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties. When the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.
Constellation Energy Servs. of N.Y. v. New Water St., 146 A.D.3d 557, 558 (1st Dept. 2017). Courts also generally have enforced force majeure clauses when the subject contracts include “epidemic” as a specific example of a contractual force majeure event. See Wyndham Hotel Grp. Int’l, Inc. v. Silver Entm’t LLC, No. 15-CV-7996 (JPO), 2018 WL 1585945 (S.D.N.Y. 2018) (citing a contract that defined a force majeure as “acts of God, strikes, lockouts or other industrial disturbances, war, terrorism, riot, epidemic, fire or other catastrophe…”) (emphasis added).
Indeed, there is a limited scope for exercising force majeure clauses under the laws of New York. Landlords and tenants alike should review their leases to determine whether pandemics are included in the definition of force majeure, to the extent their leases contain a force majeure clause. To the extent pandemics are not included in the definition, tenants may face an uphill battle in attempting to excuse lease performance due to the COVID-19 pandemic.
While New York has a far more developed body of case law on this issue, New Jersey courts also have evaluated the applicability and enforceability of force majeure clauses. In Facto v. Pantagis, the Supreme Court held that a force majeure clause “provides a means by which the parties may anticipate in advance a condition that will make performance impracticable.” 390 N.J. Super. 227, 231 (2007). The Supreme Court appears to have set forth a somewhat more liberal standard than in New York, finding that “performance would be excused if prevented … by an act of God (e.g., flood, power failure, etc.), or other unforeseen events or circumstances.” Id. A strong argument certainly can be made that the COVID-19 pandemic constitutes an unforeseen event or circumstance.
Further, the Appellate Division in 476 Grand, LLC held that New Jersey courts “recognize that performance under a contract may be excused by supervening events that make performance impractical after the contract is made.” 476 Grand, LLC v. Dodge of Englewood, Inc., No. A-2048-10T1, 2012 WL 670020, at *2 (App. Div. 2012). The Appellate Division cited the Restatement (Second) of Contracts §§ 261–72 (1981), in finding that “an obligor may contract for a lesser obligation through clauses limiting it, such as a clause reserving a right to cancel or a force majeure clause.” Id.
If a force majeure clause is included in a contract and an pandemic occurs, an argument can be made under New Jersey law for invoking the clause. Considering the less-developed body of case law on this issue, Landlords are in a position to argue that the law in surrounding states ought to guide the analysis, and that tenants are not excused from performance due to the COVID-19 pandemic. Tenants, likewise, are in a position to argue that the COVID-19 pandemic constitutes an unforeseen event or circumstance, excusing performance under their lease.
The definition of an “Act of God” under Pennsylvania law is “a natural force of such inevitability and irresistibleness that man cannot cope with it, either to predict, forestall it or control it when it arrives. It is also defined as an unusual, extraordinary, sudden and unexpected manifestation of the forces of nature which cannot be prevented by human care, skill or foresight.” Woodbine Auto v. Southeastern Pa. Transp. Auth., 8 F. Supp. 2d 475 (E.D. Pa. 1998). Under this definition, there is a very limited scope for exercising force majeure clauses under Pennsylvania law.
Importantly, “economic difficulty” is specifically excluded as a viable force majeure under Pennsylvania law. In Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 88 A.D.3d 1224 (3d Dep’t 2011) (applying Pennsylvania law), the Court held that “[e]conomic factors are an inherent part of all sophisticated business transactions and, as such, while not predictable, are never completely unforeseeable; indeed, financial hardship is not grounds for avoiding performance under a contract.”
With regard to property leases in Pennsylvania, unless pandemic events are specifically listed in the subject lease, landlords are in a secure position as the law currently stands.
As many courts are closed and this is new territory, we expect the case law may evolve as the courts reopen. Arguments against the consideration of pandemic events as force majeure events may or may not ultimately be successful, depending on new rulings as they are issued. In the event landlords wish to retain tenants facing default after the pandemic emergency passes, it may be worthwhile to consider a deferral or payment plan that allows the tenant to stay afloat while providing the landlord with income to cover expenses. Landlords and tenants alike are advised to consult with an attorney experienced in this area to determine viability of such plans and to protect their interests.
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To best service our clients in response to the COVID-19 pandemic, Ansell Grimm & Aaron, PC created a Task Force comprised of attorneys from various practice areas to digest new legislation and guide our clients through these difficult times. For more information please contact us at Covid19TaskForce@62q.f7d.myftpupload.com.
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The information provided in this alert was up-to-date at the time of publication, is provided for general purposes only and does not constitute legal advice, and the transmission and receipt of this information does not create or constitute an attorney-client relationship.