The coronavirus pandemic has created a host of new legal issues impacting both commercial and residential leaseholds. As the government restrictions begin to relax and non-essential businesses ease back into operation, many tenants are looking for ways to avoid some or all their obligations under their lease agreements. With the Governor’s Executive Order prohibiting all evictions expiring on June 13, 2020, and the CARES Act evictions moratorium set to expire on July 25, 2020, commercial and residential landlords and tenants should be considering how the current crisis has impacted their rights. Below we provide a brief introduction to some of the legal concepts that the landlords and tenants may grapple with if they seek relief in court to deal with a lease default.
Force Majeure Provisions
So-called force majeure clauses are written lease provisions that excuse a party’s nonperformance when an “act of God” or some other event outside the control of the parties prevents a landlord or tenant from meeting their contractual obligations. At first blush, it may seem that the COVID-19 would obviously meet the definition of an “act of God.” Nevertheless, a careful review of Colorado law and the operative lease should precede any conclusion that a tenant is off the hook for unpaid rent during the Stay-at-Home or Safer-at-Home Order.
Though not forbidden, it is uncommon to find a force-majeure provision within a residential lease. In the commercial context, however, force majeure language is commonly included, and it presents an obvious place to begin the legal analysis. Whether a tenant’s inability to pay the rent constitutes a force-majeure event will most likely turn upon if and how the lease defines this important term. Courts in Colorado typically start their review by considering the plain language of the lease to see if a force majeure provision is present, and if so, whether the tenant’s circumstances trigger its protections. Since judges narrowly construe force majeure provisions, close attention to the specific language of the lease is important. Following the H1N1 pandemic in 2009, many attorneys began modifying their leases to expressly include the terms “epidemic” and “pandemic” within the definition of a force majeure event. If such language is present, a tenant is more likely within their rights to terminate the lease or delay performance following the Stay-at-Home Orders and business shutdowns.
Even in the absence of the terms “epidemic” or “pandemic” within the force-majeure provision, a court may still find that the clause has been triggered. In such cases, a significant question will be whether the present circumstances were foreseeable and whether the tenant’s inability to perform is truly impossible. Mere financial hardship is historically insufficient, by itself, to excuse performance. Thus, a tenant considering the assertion of a force majeure provision to avoid some or all of their contractual obligations should proceed with caution. The parties to a lease dispute will likely disagree about whether the provision has been triggered and costly litigation may ensue.
Common Law Principles Excusing Performance
Even in the absence of a force majeure clause, landlords and tenants may also consider the assertion of common law defenses such as impossibility/impracticability of performance and the doctrine of frustration of purpose.
Under the doctrine of impossibility or impracticability of performance, a party’s contractual obligations might be excused when it becomes impossible or impracticable for that party to perform. As with force majeure provisions, a court considering the application of this doctrine will likely consider whether the events were foreseeable, and whether the non-occurrence of the event was an assumption made by the landlord or tenant. In a similar fashion, the doctrine of frustration of purpose, a tenant’s obligations under a lease may be avoided if the principal purpose in entering into the lease has been substantially frustrated through no fault of the tenant’s own and where the nonoccurrence of the event was a basic assumption upon which the lease was founded. Whether these are viable defenses will depend upon the specific facts of each case. While poor economic conditions generally do not trigger these legal doctrines, the Stay-at-Home Orders and resulting business shutdowns may meet the criteria necessary to provide a tenant with relief from their lease obligations. Depending upon the amount in controversy, these are issues that could be heavily litigated in court.
In addition to these issues, landlords and tenants should be considering the various other ways that COVID-19 affects their rights and responsibilities. The pandemic has impacted a number of common landlord-centered responsibilities, such as the obligation to maintain clean common areas to avoid potentially costly indemnity litigation. Tenants must also consider how the pandemic has impacted their rights and obligations. The Stay-at-Home Orders have created conflicts between government orders and their lease obligations. Tenants may need approval from the landlord before making alterations to the leased premises in order to comply with government-mandated density caps. A landlord who chooses to deny a request to modify a leased premises could inadvertently provide a defense to a tenant in default.
These are just a couple of examples of the many issues that landlords and tenants may face. As always, careful consideration of Colorado law and the lease is paramount before any action is taken. Zumbrennen Law has extensive experience counseling both landlords and tenants regarding their rights under commercial and residential leases and we are here to help.