The COVID-19 pandemic promises to unleash an enormous burst of legal creativity and judicial activity, as attorneys and their clients seek to navigate a new and uncertain environment.

With virtually all activities halted by lockdowns, businesses have been forced to operate on an extremely limited basis, or even close their doors entirely, particularly bars, restaurants, hotels, movie theaters, and others in the hospitality sector.

Lawyers confronting these issues immediately looked to the force majeure clauses in contracts like commercial leases. A force majeure clause excuses one or both parties to the contract from certain or all obligations as a result of extraordinary events.

As an example, a typical force majeure clause was discussed in a recently-litigated bankruptcy case in Illinois, In re Hitz Restaurant Group, Case No. 20 B 05012, per Judge Donald R. Cassling. In Hitz, decided on June 3rd, the relevant force majeure clause provided that:

Landlord and Tenant shall each be excused from performing its obligations in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by act of God, fire, earthquake….riot, mob violence….governmental action or inaction…. or any other cause, whether similar or dissimilar to the foregoing, not within the reasonable control of the party or its agents, contractors or employees…

In other words, an extraordinary event—as extraordinary as an earthquake, civil unrest, or government order, could allow for the modification or termination of a contract.

On March 13, the United States declared a nationwide state of emergency as a result of the COVID-19 pandemic. Most states also issued their own emergency restrictions. These orders prohibited or severely restricted almost all commercial activity, making it difficult to pay rent or meet other commercial obligations. Certain executive orders also stayed the ability of landlords and other creditors to evict tenants or obtain default judgments.

When those stays and forbearances dissolve, many businesses will likely lack the resources to immediately honor their obligations. The origin of force majeure clauses began in the common law, allowing for the modification or discharge of contractual obligations when the purpose of the contract becomes impossible or otherwise frustrated.

One celebrated case defining the doctrine of frustration of purpose goes back to England in 1903, with the coronation of Albert Edward to succeed his mother, Queen Victoria, to the British throne. In that case, Krell v. Henry, 2 K.B. 740 (C.A.1903), a tenant had leased an apartment with a window to watch the coronation parade. When the coronation was postponed, the tenant sued to recover his deposit. He argued that the clear purpose of the rental, as reflected in the price, was to watch the coronation, even if he could still have occupied the apartment at that time. The court agreed. in the years that followed, businesses began to include explicit force majeure clauses in contracts.

In the Hitz case referenced earlier, where the force majeure clause applied to both landlord and tenant, the bankruptcy court held that the emergency order issued by the State of Illinois forbidding on-premises food service constituted a major event sufficient to require a modification of the lease. As a result, the rent accruing after the governor's emergency order was reduced by 75%, as the court reasoned the tenant was allowed use of only 25% of the premises, since on-premises dining was prohibited.

In cases where there is no force majeure clause in a contract, courts have been willing to consider the doctrines of impossibility as well as frustration of purpose For example, in City of New York v. Local 333, Marine Div. & Int'l Longshoremen's Ass'n, 79 A.D.2d 410, 411–12, 437 N.Y.S.2d 98, 99 (1981), aff'd sub nom. City of New York v. Local 333, Marine Div., Int'l Longshoremen's Ass'n, 55 N.Y.2d 898, 433 N.E.2d 1277 (1982), a contractor argued that he was not liable for nonperformance of a contract because a strike, which he claimed was not within the "reasonable expectations" of the parties, made it impossible to carry out the purpose of the contract.

In applying these principles to the current COVID-19 crisis, if a tenant and landlord signed commercial lease with the expectation that the tenant will operate a dine-in restaurant at that location, the tenant's attorney has a reasonable basis for arguing that a government-ordered lockdown preventing on-site dining has undermined the purpose of the contract, thereby giving rise to the defenses of frustration of purpose and impossibility.

As the Hitz court found, a remedy in these circumstances might be for a tenant to seek a temporary abatement of rent or modification of lease reducing the rent proportionally to the reduction in lease value, where a restaurant continues to provide food and beverage delivery on a limited basis.

For a business trying to modify or void the terms of a commercial lease, the frustration of purpose and impossibility arguments offer alternatives where the contract does not include a force majeure clause, or when a force majeure clause is written exclusively for the benefit of one party.

COVID-19 and the emergency orders were about as unforeseeable as any possible development in recent history. We expect federal and state courts to continue to explore these issues in the months ahead, as businesses forced to close by emergency orders attempt to negotiate with landlords and other creditors. As they try to modify or terminate commercial leases, lawyers will need to think carefully about the doctrines of impossibility and frustration of purpose, as well as force majeure clauses.

Robert Rattet and Derek Wolman are partners at Davidoff Hutcher & Citron. William Mack, a partner at the firm and James Glucksman, of counsel at the firm, assisted in the preparation of the article.