Navigating Commercial Leases Under Florida Law During the COVID-19 Crisis
Landlords and tenants are reviewing their leases and applicable law to determine what relief or defenses tenants’ may have to non- reduced rent payments. Despite government orders that restricted business at leased properties from operating, leases are at their core contracts that are enforceable against the nonperforming party. The following summarizes the more salient and prominent issues.
Force Majeure (FM)
A relevant and possibly applicable part of a lease is the FM clause. In determining if a FM event has occurred, the test in Florida is whether under particular circumstances, there was a significant interference occurring without the party’s intervention that could not have been prevented by the exercise of prudence, diligence and care. A FM event has to be not reasonably foreseeable in the ordinary course of the industry and beyond the reasonable control of the party invoking it as an excuse for non-performance.
FM is not included in every lease and even then, requires a complicated analysis as to whether or not it can serve as sufficient excuse for nonperformance. While largely ignored, larger national tenants often scrutinize and negotiate this clause and depending upon interpretation it may represent an effective defense. Whether COVID-19 constitutes a FM event will be determined by lease-specific language.
Ultimately it’s likely that most courts will determine that delays caused by the virus and resulting executive orders, were beyond “reasonable control” of the parties; were unforeseeable; were the cause of nonperformance; and were so severe so as to excuse nonperformance. However, there isn’t much case law in Florida.
Although a party such as a landlord, may acknowledge that COVID-19 is a FM event that may relieve certain obligations under a lease, (such as continuous performance) the FM clause is often drafted in a manner that it does not excuse a tenant from timely payment of obligations. FM clauses will surely be the subject of heavy litigation as the parties interpret the clause in the manner that best supports their respective positions.
Impracticability/Impossibility of Performance (IOP) and Frustration of Purpose (FOP)
Performance may further be excused through common law defenses including IOP and FOP. Both are available in most jurisdictions, however entitlement to them is generally very difficult to establish as Florida courts have applied them sparingly.
Under impracticability, a party’s contractual obligation may be discharged if after the contract is made the party’s performance becomes impracticable by the occurrence of an event that is outside a party’s control; and the occurrence was a basic assumption on which the contract was made. Impossibility applies when the purpose of the contract has on one side become impossible to perform. IOP is a defense to nonperformance of a contract where the facts making performance impossible were not available to the parties prior to executing the contract. This is used with great caution if the relevant business risk was foreseeable at the inception of the agreement, however economic downturns and other market shifts do not constitute unanticipated circumstances in a market-based economy.
Effects of COVID-19 will likely make performance under certain contracts impossible. Executive orders closing businesses will presumably be asserted as a defense to a tenant’s performance under its lease. While COVID-19 may render some performance impossible, it simply may only prove performance more difficult under the circumstances. Whether IOP will provide defense to lease performance will be determined case-by-case.
FOP means that the purpose for which the parties entered into the contract has been frustrated and provides a defense to further performance. While IOP comes into play when it’s impossible for one party to perform, FOP applies to the underlying purpose of the contract being frustrated and occurs when one party finds that the purpose for which it bargained, and which purposes were known to the other party, has been frustrated due to the failure of consideration, or IOP by the other party.
The courts have further held that in order for the purpose of a contract to be frustrated, it must be due to circumstances beyond the party’s control. FOP is a difficult defense to establish because the courts have been careful not to find commercial frustration. The consequences of COVID-19 will frustrate the purpose of some lease contracts, however whether FOP will be a successful defense to lease performance failures will depend on the purpose of the lease and will have to be evaluated individually.
Inverse Condemnation (IC) and Taking’s Clause (TC)
Government mandates and local executive orders that restricted businesses in an effort to limit the spread of COVID-19 give rise to whether the TC of the Fifth Amendment requires governmental compensation for such interference. While there are court decisions holding the TC requires compensation in some situations where the government restricts property use rights without actually seizing property, they have also held that the exercise of police power (in this case government authority to protect public health and safety) do not qualify as TC requiring compensation to the affected party.
Not all exercises of police power are protected from the requirements of the TC. However, cases requiring compensation to the affected party differ in a pandemic where the operation of business risks spreading the disease, poses a threat to public health and safety. The fact that closures were “temporary” and there was no physical occupation of the property make it unlikely that the owner/tenant will win an IC case, police power issue aside. Perhaps another reason the courts are not likely to rule that COVID-19 constitutes IC is that they will not want to be seen as obstructing the goal of public safety and health. The significance and immediacy of this crisis plus the amount of compensation that the government would be required to pay, make a ruling in favor of IC unlikely.
Business Interruption Insurance
A thorough analysis is beyond the scope of this article, however the policyholder would have to prevail in court that they suffered “direct physical loss or damage” as a result of the virus which still doesn’t automatically provide an avenue for recovery, especially if a virus exclusion is in the policy. Expect policyholder counsel to litigate ways around it, and also invoke “civil authority” coverage (government order prohibits an insured’s access to its property) as well as other novel claims.
Richard N. Schermer is a partner and the head of the retail development group practice at Pathman Lewis in Miami. Contact him at email@example.com.