The Evolution and Importance of Force Majeure Clauses in Commercial Real Estate Lease Agreements: A Focus on the Post-COVID-19 Era and the Arizona Market
Force majeure clauses have been a part of commercial real estate lease agreements for as long as anyone can remember. These crucial provisions, often regarded as the “act of God” clauses, allow parties to a lease agreement to suspend or terminate their obligations when certain unforeseen, uncontrollable events occur, rendering performance impracticable, illegal, or impossible.
Historically, force majeure clauses have covered events like war, civil unrest, natural disasters, or terrorism. However, the landscape of these clauses has seen a profound shift in the wake of the COVID-19 pandemic, a pivotal event that has caused significant disruption in the commercial real estate sector worldwide, including in Arizona.
The Post-COVID-19 Shift in Force Majeure Clauses
As the COVID-19 pandemic unfolded, many commercial tenants found themselves unable to fulfill their lease obligations due to the government-imposed restrictions on businesses and drastic shifts in consumer behavior. The result was a wave of disputes and litigation cases, with both tenants and landlords looking to force majeure clauses for relief.
Many traditional force majeure clauses did not expressly account for pandemics or government-ordered shutdowns. This ambiguity led to varying interpretations, creating legal uncertainty. Consequently, many tenants found it challenging to prove that COVID-19-related disruptions fell under a force majeure clause, leading to significant financial burdens.
Recognizing this deficiency, real estate attorneys and contract parties began to revise and expand force majeure clauses to expressly include pandemics, government-imposed lockdowns, or related events. In 2023 and beyond, this trend of providing greater clarity and inclusivity in force majeure clauses is expected to continue, not just in response to the recent pandemic, but also to cater to future unforeseen global disruptions.
Force Majeure Clause Considerations for Landlords
For landlords, the critical concern is to manage risk and ensure continuity of income. The recent trend towards more inclusive force majeure clauses may seem unfavorable, as it opens up more opportunities for tenants to invoke force majeure and potentially evade lease obligations. However, it’s crucial to remember that an overly restrictive or ambiguous clause might not stand up in court, or may be subject to multiple interpretations, especially given the legal precedent set during COVID-19.
Landlords should focus on crafting balanced force majeure clauses, which explicitly state the scenarios that would allow for suspension or termination of lease obligations. It may also be prudent to require tenants to prove that they’ve exhausted all reasonable alternatives before invoking force majeure. It is advisable for any landlord to revisit force majeure clauses in their lease agreements with an experienced real estate attorney. Even if you did not run into specific issues during the pandemic, it is a good time to work with an attorney that did handle legal issues related to any real or perceived lack of clarity in these clauses so you can be confident your lease agreement will be enforceable.
Considerations for Commercial Tenants
For tenants, a well-defined force majeure clause can provide valuable protection in unpredictable times. It is essential to ensure that the clause is broad enough to cover events that could significantly impact your ability to fulfill lease obligations, such as pandemics or government-imposed restrictions. Tenants should also pay attention to notice requirements, as many force majeure clauses require tenants to promptly notify landlords upon the occurrence of a force majeure event.
Any commercial tenant should use the lessons learned from the pandemic related to contractual obligations and unforeseen circumstances to make sure they feel comfortable with the protections granted in lease agreements. It is always advisable to review a commercial lease agreement with a real estate attorney in your state before executing. You can also use the issues that arose for other tenants as an opportunity to review existing agreements and pursue potential amendments to update any clauses that might be too vague.
The Arizona Commercial Real Estate Market
The Arizona commercial real estate market, particularly in major cities like Phoenix and Tucson, experienced notable disruptions due to the COVID-19 pandemic. As the economy is in recovery mode, and businesses are redefining their workspace needs, the interpretation and application of force majeure clauses in commercial lease agreements have become more critical than ever.
Arizona law generally requires a strict interpretation of force majeure clauses. In other words, if the clause doesn’t specifically list a certain event, such as a pandemic, courts may be unlikely to find that the event qualifies for force majeure relief. Therefore, both landlords and tenants in Arizona should work closely with an experienced real estate attorney to ensure their interests are adequately protected in lease agreements.
Always Review Commercial Lease Agreements with an Experienced Real Estate Attorney
Force majeure clauses are evolving to reflect the realities of an increasingly unpredictable world. As we navigate these challenging times, landlords and tenants in the commercial real estate sector must adapt and proactively address potential disruptions in their lease agreements.
At Gottlieb Law, we are committed to guiding our clients through this new legal landscape. We bring our expertise to bear in helping you draft, review, and negotiate commercial lease agreements, ensuring that your interests are thoroughly protected in the face of evolving force majeure clauses. Whether you are a landlord seeking to minimize risk or a commercial tenant looking for adequate protection, our seasoned attorneys are ready to assist you. Contact our firm today at 602-899-8188 to schedule an initial consultation or make an appointment on our contact us page.