Client Alert: COVID-19 - Real Estate Lease and Contract Enforcement in Maryland
Date: April 10, 2020
What does this mean for commercial landlords and tenants? As a result of the COVID-19 pandemic, commercial landlords and tenants are encountering brand new challenges and difficulties in adhering to contractual requirements. This Alert briefly examines relevant legal doctrines that may be invoked as defenses to non-performance of contractual obligations in commercial real estate leases and contracts that are governed by Maryland law and how Maryland courts might apply such doctrines. This pandemic is unique in both scale and magnitude, and looking to how Maryland and other courts have dealt with similar issues and defenses may assist in guiding parties on how to proceed in light of the COVID-19 pandemic and associated difficulties.
Force Majeure
Some leases and agreements contain a “force majeure” clause. Force majeure is a French term that translates literally to “superior force.” A force majeure clause contemplates the rights and responsibilities of the parties to the agreement in the event that one or both parties are unable to perform their contractual obligations due to circumstances outside of the reasonable control of a party. One type of event commonly found in force majeure clauses is force majeure which arises from changes in the political or legal environments, such as war, insurrection, labor disputes, terrorist acts, or transportation shutdowns. Another common group of circumstances found in force majeure clauses are forces of nature, typically “Acts of God,” or extreme natural disasters. Additionally, many force majeure provisions contain “catch-all” language encompassing events not specifically listed which are “outside the reasonable control of the party affected.”
There are a few Maryland cases that discuss the applicability, enforceability, and scope of force majeure clauses. Maryland courts have interpreted and enforced force majeure clauses in strict accordance with the stated terms of the force majeure clause. Nonperformance will generally only be excused if the event that causes the nonperformance is specifically identified in the exclusive list of qualifying events. Courts from other jurisdictions outside of Maryland have recognized that an event not specifically identified in a force majeure clause may qualify as force majeure if it is similar in nature to one or more events identified in the clause.
As force majeure is a product of contract law, force majeure provisions often carve-out obligations that parties must fulfill even if a force majeure event occurs. For example, many commercial leases specify that force majeure language does not alter a tenant’s obligation to pay rent or other charges that come due under the lease. If a force majeure clause contains such a carve out, then a party to a commercial lease may be excused from performing non-monetary obligations in the lease such as a tenancy requirement or a requirement to continuously operate, but the carve out would not alter the tenant’s obligation to pay rent and any other charges due under the lease.
The general rule is that it is not sufficient for a party to establish that the force majeure event made performance more difficult or burdensome from a financial perspective. Rather, the party must establish that the force majeure event prevented it from fulfilling its obligation. For instance, although a party may be able to establish that a force majeure event impacted its revenue stream which will make rent payments more burdensome, that is not the same as that party being prevented from making rent payments by the event. Additionally, it is the general rule that a party seeking to rely on a force majeure clause will usually have to demonstrate that it has taken reasonable steps to avoid or mitigate the event and its consequence(s), and that no alternative means for performing under the contract exist. Such a showing is fact-specific and depends upon the language and subject-matter of the agreement in question and the party’s actions in light of the specific language in the agreement.
Common Law Doctrines of Impossibility, Impracticability, and Frustration of Purpose
In the absence of an express force majeure provision, the common law doctrines of impossibility, impracticability, or frustration of purpose may apply. These doctrines are similar in some respects, but contain some important differences.
The doctrine of impossibility excuses a party from performing contractual obligations when unforeseen circumstances beyond the party’s control arise after formation of the contract making performance impossible. This doctrine may apply when the promisor is not at fault, but due to an unforeseen intervening post-contract formation event, performing an obligation under the agreement becomes objectively impossible. Maryland law sets a very high bar for demonstrating impossibility and in order to succeed under this doctrine, performance under the agreement must be objectively impossible. Even the slightest possibility to perform typically can preclude application of the doctrine of impossibility.
The doctrine of impracticability (sometimes called commercial impracticability) is similar to the doctrine of impossibility, but does not require that performance be objectively impossible. The defense of impracticability contains three elements: (1) an unexpected occurrence of an intervening act; (2) such occurrence was of such a character that its non-occurrence was a basic assumption of the agreement of the parties; and (3) the occurrence made performance impracticable. While a party’s ability to demonstrate impracticability depends on the facts of each specific case, the party asserting impracticability must demonstrate more than a mere increase in difficulty, cost, or burden to perform. Some courts from other jurisdictions outside of Maryland have held that an obligation is impracticable when it can only be performed at an excessive and unreasonable cost.
Frustration of purpose occurs when the entire purpose of an agreement is completely frustrated by a supervening event or circumstance outside of the control of the party asserting the defense. This doctrine is similar to impossibility and impracticability, but frustration of purpose focuses on whether the event at issue has obviated the entire purpose of the contract, rather than whether the event made performance of an obligation impossible or impracticable. Maryland courts examine three factors when determining whether the frustration of purpose doctrine applies: (1) whether the intervening act was reasonably foreseeable; (2) whether the act was an exercise of sovereign power; and (3) whether the parties were instrumental in bringing about the intervening event. If the court determines the requirements for the doctrine of frustration of purpose are met, all or a portion of the agreement can be discharged depending upon the facts of the situation. It is important to note how narrow this doctrine is—the entire purpose of the contract or portion of the contract must be completely frustrated for it to apply.
The doctrines and principles discussed in this Alert may also be applicable to other contracts that do not involve commercial real estate. Those contracts, however, may also be governed by other statutory provisions and/or common law doctrines as well.
Conclusion
Courts will be faced with unique and novel questions as the COVID-19 pandemic continues to spread and the federal government and state governments enact unprecedented measures to contain the spread of the pandemic. The lack of definitive guidance with respect to how courts from Maryland and other states will apply force majeure clauses and common law non-performance doctrines discussed above in light of the COVID-19 pandemic creates uncertainty for landlords and tenants alike. While the doctrines discussed above are alive and well, it appears that Maryland courts construe them narrowly so the specific set of facts and circumstances applicable to the commercial real estate lease or contract will be determinative as to what, if any, relief a party can obtain by asserting these doctrines. It remains to be seen whether courts will adhere to past approaches for the issues discussed above or whether they will employ different approaches in an effort to afford relief to those who have been negatively affected as a result of the COVID-19 pandemic.
As parties begin to review their leases and other agreements, our Real Estate and Corporate teams are available to assist with that review and provide guidance on the availability of any non-performance defenses under circumstances unique to each lease or contract.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.