By: Minh Luong and Vikram Subramanian
It has become difficult, costly, or even impossible for some businesses to maintain contractual obligations, like commercial leases, due to the coronavirus (COVID-19) pandemic. Luckily for business owners, the doctrines of commercial frustration and force majeure may allow them to rescind leases without penalty if unforeseeable circumstances make it impossible for them to operate under the stated purpose of their lease.
The commercial frustration doctrine applies generally to unforeseen circumstances that make a party’s contract performance virtually impossible. The doctrine has been commonly used to nullify contracts during wartime. Because past US government wartime restrictions mirror those of the present day, commercial frustration applies during the coronavirus pandemic. However, whether a party can use the doctrine of commercial frustration depends on the specific terms of the contract.
Most leases contain a statement of purpose. If not, a purpose may still be implied by the circumstances. Both parties must have a mutual understanding of the purpose. Courts have held that commercial frustration is only applicable if the “purpose or desired object of both parties…have been frustrated.”[1]
Vague or general commercial leases cannot be frustrated due to COVID-19 because tenants could use the property for any purpose. On the other hand, when leases restrict properties to a specific purpose that businesses cannot perform based on a government order, then it is possible to terminate the lease by using commercial frustration. For example, a tenant with a lease stating that the property shall be used only as a beauty salon has a greater chance of successfully applying the doctrine of commercial frustration during the pandemic.
In most jurisdictions, commercial frustration only applies when government action makes a lease meaningless or destroys its value. It will not apply when governmental acts make contract performance more difficult or less profitable. For example, while many restaurants are forced to close their dine-in areas during the pandemic, they are still able to provide take out or delivery services. Although their profits may be significantly reduced, these restaurants would not be successful in applying the doctrine of commercial frustration.
Force majeure contract clauses provide another option for businesses to escape their commercial leases due to unforeseen events beyond their control, such as public health events like the COVID-19 pandemic. Contracts must already contain a force majeure clause for businesses to utilize this option, with common language including phrases like “Act of God,” “disaster,” or “catastrophe.”
To break a commercial lease or other contract using force majeure, the affected party must show that it is impossible to perform the contract terms during the pandemic.[2] They must also prove that their contract nonperformance was unforeseeable, outside of their control, and could not have been prevented.[3] Finally, the impacted party must also establish that their business has faced significant difficulty, hardship, or economic/commercial impracticability because of the pandemic.[4] A mere increase in expenses does not qualify for force majeure.[5]
Millions of US businesses are severely impacted by the COVID-19 pandemic. Commercial frustration, force majeure, and other legal instruments can provide relief to businesses by excusing their commercial lease obligations. The process for breaking a commercial lease is very specific to your contract terms and tenant and landlord circumstances. Contact our experienced attorneys at info@chugh.com to discuss the options best tailored to your commercial lease.
[1] Brown v. Oshiro 68 Cal. App.2d 393 (1945)
[2] See Butler v. Nepple (1960) 54 Cal. 2d 589, 598-599
[3] See Pacific Vegetable Oil Corp. v. C. S. T., Ltd. (1946) 29 Cal.2d 228, 238.
[4] See Butler v. Nepple (1960) 54 Cal. 2d 589, 598-599.
[5] Oosten v. Hay Haulers etc. Union, supra, 45 Cal.2d 784, 788; cf. 6 Williston on Contracts, rev. ed., § 1968, pp. 5524-5525.
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