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How does COVID-19 affect contractual obligations?

Thursday, March 26, 2020


Legal Overview

Businesses are facing extraordinary circumstances, many of them for the first time in their corporate history. “These circumstances that may excuse or delay their obligations to perform under existing contracts due to the occurrence of a force majeure event,” according to McDermott Will & Emery Law Firm.

“Force majeure is a contractual defense that allows a party to suspend or discontinue performance of its contractual obligations under specific circumstances. It may also operate to limit a contract party’s liability.” What can be defined as a force majeure event depends on the specifics of the contract, applicable law and more.

COVID-19 could be labeled a force majeure event if the provisions include wording such as “pandemic,” “epidemic” and/or “disease.” Other broader terms like “acts of God” and “national emergency” could also help to qualify COVID-19 and the effects of the virus as a force majeure event. Although, as stated before, it largely depends on the terms of the contract, the governing law and how courts in the relevant jurisdiction interpret force majeure provisions in relation to COVID-19.

In Summary

Because COVID-19 has been declared “a public health emergency of international concern” by the World Health Organization and Center for Disease Control, travel bans, border closures, gathering restrictions, closure of non-essential stores and businesses and other precautions have been put into place. These measures have caused countless businesses to greatly change the way they function or halt business altogether. This can lead to businesses being unable to follow through with their contractual obligations. This is where force majeure comes in and can help limit or even eliminate liability for not being able to fulfill their obligations because of unforeseen events outside of the party’s control.

Our Recommendation

Retail Investment Group recommends landlords read their policy to determine whether there is business interruption coverage exclusion for viruses, such as COVID-19. The industry trend has been to exclude business interruption coverage for viruses, but this is not.

As a building owner, what should you do if you are receiving letters, emails and calls from your tenants? The answer to that can be a tricky one. There are companies that call on behalf of tenants with the sole purpose of scaring landlords into making lease changes. This happens in good markets and will certainly increase during times like these, according to Retail Investment Group’s Founder and Managing partner Steven Davis. “I would encourage landlords to balk at these third-party companies and get facts direct from the tenant,” said Steven. “If a tenant claims sales have dropped, ask them to show you the numbers.”

Have further questions about how to handle landlords, tenants, etc. during this time? Contact Retail Investment Group via email at info@retail1031.com.