When Lightening Strikes…Force Majeure Clauses in Commercial Leases

As recent events have shown over the last few years, living in Mississippi, we are susceptible to all sorts of catastrophic weather including hurricanes, tornadoes, lightening, hail, and flooding.  Because these “acts of God” are uncontrollable and unpredictable, it is prudent to address the ramifications of these incidents with force majeure clauses in commercial lease agreements.

Force majeure literally means “greater force.”  When this term or provision is used in a commercial lease agreement, its intent is to excuse liability of a party because of an uncontrollable event.  When drafting a force majeure provision in a commercial lease, it helps to understand what events actually constitute force majeure.  Generally, force majeure provisions are designed to cover those events that are outside of either party’s control, and can include the following: natural disasters, such as earthquakes, hurricanes, floods, tornados, and fire; human events, such as riots or wars; and certain failures to perform outside the control of the contracting party, such as labor disputes and governmental restrictions.

While it is important to understand what events are typically covered by a force majeure provision, it is equally as important to understand what types of events are not or should not be covered by a force majeure provision.  An event that might typically be described as a force majeure event might not be considered a force majeure event if the event occurs frequently and should be reasonably expected by the parties.  In some situations, seasonal rains and even flooding might not be considered a force majeure event.  In addition, even if the event did not regularly occur when the commercial lease was entered into, an event might not be considered a force majeure event if the event began to occur frequently after the execution of such.

Aside from defining what constitutes an event of force majeure, there are additional issues that must be taken into consideration by the parties to a commercial lease.  For example, if a party determines an event of force majeure has occurred, then there must be some mechanism in the commercial lease that dictates how that party provides the other party notice of its inability to perform.  In addition, the parties might want to incorporate varying standards of performance in the force majeure provision of the commercial lease agreement.  For example, the parties might want to agree that, notwithstanding an event of force majeure, each party will make reasonably diligent efforts to perform in such circumstances.  Along the lines of standards, the parties may also want incorporate an industry standard of performance in light of a force majeure event.

Like any other provision of commercial lease, the parties must understand relative bargaining positions.  Typically, the commercial lease agreement is first generated by the lessor.  The lessor needs to understand that if it has greater leverage in the transaction, a court interpreting a force majeure provision is generally going to construe such in favor of the non-drafting/lessee party.  However, a lessee, with relatively less leverage in a leasing transaction, should not rely solely on the premise that a force majeure provision might be construed in his or her favor.  The lessee has a vested interest in making sure that the terms of a force majeure provision are clearly set forth and are reasonable in light of the circumstances.

It should be clear that, as with any other provision of a commercial lease, force majeure provisions can be complicated and present a number of issues that the parties must decide upon during the negotiation process.  In addition, neither party should solely rely on the force majeure provision of a commercial lease as the form of risk mitigation.  It is prudent for both the lessor and the lessee to explore business interruption insurance as another viable mechanism to mitigate the risk of these situations that are outside of each party’s control.