As pandemic shelter-in-place orders continue and most attorneys work remotely from home, many law firms are asking: Are we obligated to pay rent even though we are unable to use our office space?
Often, landlords have a quick answer: the force majeure provision. In many cases, the provision provides that if there is a force majeure event, it excuses landlords’ obligations under the lease, but the force majeure event does not excuse the payment of rent.
But, lawyers know a single clause may not be read in isolation. What was intended by the parties is often a more complicated question than reading a few words out of a contract that is thousands of words long.
Office Space Is a Common Characteristic in Leases
A careful look at law firm leases reveals that they have a common characteristic: They frequently contain language discussing tenant’s intended use of the premises exclusively as an office space. Moreover, these leases provide that rent payments begin only when the premises are ready to support tenant’s intended use and that rent may be suspended when the premises no longer serve their intended purpose.
These provisions recognize that the fundamental bargain of the lease is that tenant will have a space to operate its business and its rent obligations flow naturally from having such space.
However, as the pandemic and resultant governmental restrictions continue to limit law firms’ business operations, as well as their access and use of the premises, this fundamental bargain has also been impacted. How do these facts affect, or even excuse, law-firm tenants’ obligations to pay rent?
A number of theories may support law firms’ ability to abate or avoid rent during the current unprecedented time.
Specific Lease Provisions May Give Tenant a Right to Abate Rent
The lease may contain provisions giving tenant a right to abate rent in the event tenant cannot access or use the leased premises. Such language allows tenant to argue that, as tenant no longer has access to, or use of, the leased premises, its contractual right to rent abatement has been triggered.
Regarding the force majeure clause, tenant contends it is not having access or use of its space—not the force majeure event itself—that is the basis for an abatement of rent.
Having a Space for Tenant’s Business Operation Is a Condition for Rent
As an intuitive matter, tenant’s rent obligations depend on tenant’s actually having a space to operate its business—as it would make little sense for anyone to pay for a space they cannot access and use to operate their business.
There are numerous provisions in an office lease supporting this concept that the rent obligations are conditioned on the provision of premises suitable for the intended business operations. Places to look are where the lease discusses rent obligations in connection with the condition or utility of the premises.
In the wake of Covid-19 and the government-ordered cessation of on-site business operations, the space-for-operation condition has not been satisfied. Thus, tenant’s contingent obligation to pay rent is excused.
Landlord may argue, however, that the non-occurrence of the space-for-operation condition has been excused by the force majeure provision. The argument is unpersuasive because the typical language of a force majeure provision does not address, let alone excuse, the non-occurrence of a condition.
Instead, such language often pertains expressly to “obligations,” which are fundamentally different from conditions, and thus may not apply in this instance.
Landlord’s Failure to Provide a Suitable Space Excuses Tenant’s Rent Obligations
Under most leases, landlord incurs an obligation to operate the base building and makes certain representations and warranties regarding tenant’s right to use the premises as intended. In addition, there are other implied obligations on landlord’s part to provide premises suitable for, and capable of supporting, tenant’s intended use.
During this pandemic which has resulted in tenant’s inability to use the leased premises in the manner contemplated by the lease, landlord may be in breach of its obligation. This breach, in turn, may excuse tenant’s rent obligations.
This breach-of-contract theory may provide a stronger defense. However, because the theory is based on an obligation, it is more susceptible to landlord’s force majeure argument.
The question remains as to whether the force majeure provision in fact applies when it neglects to list “pandemics” as a force majeure event. The rule of strict interpretation against force majeure provisions may thus render the provision inapplicable.
The Purpose of the Lease Has Been Frustrated by Government-Ordered Suspension of Tenant’s On-Site Business Operations
This theory is based on equity: The parties entered into the lease for the purpose that tenant will have a space to operate its business; when that purpose cannot be effectuated, the law excuses the parties’ obligations under the lease, including tenant’s obligation to pay rent.
The frustration-of-purpose doctrine applies where “[p]erformance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event.” Lloyd v. Murphy, 153 P.2d 47, 50 (Cal. 1944). This language neatly describes law-firm tenants’ current situation: Due to the government-ordered cessation of on-site operations, tenant is receiving virtually no benefits of its bargain under the lease. The purpose of the lease has thus been frustrated, and the law will excuse tenant’s obligations thereunder.
Many law firms are having their offices sit empty, while their landlords claim rent obligations continue to accrue. As law firms prepare to come to the negotiating tables with their landlords, they are well advised to read the lease, the entire lease. The answer to whether rent is owed is not found in a 50-word force majeure provision, but in the intent expressed in the thousands of negotiated words.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Gregory D. Call is a partner in Crowell & Moring’s San Francisco office where he has an active trial practice representing both plaintiffs and defendants in complex commercial cases.
Ryan Merker is an associate in the San Francisco office of Crowell & Moring. His nationwide practice focuses on a variety of complex litigation matters in state and federal courts.