Force majeure clauses are contractual provisions that discharge a party when an event beyond either party’s control makes the contract’s performance impossible. These clauses are found in many different types of contracts, from commercial leases to construction and other commercial contracts.
What sort of event needs to take place to trigger a force majeure clause in a contract, and what effect does it have? This article considers these questions, along with a recent decision of the Court of Appeal for Ontario in which a commercial tenant stopped paying rent during a mandatory pandemic lockdown and defended the landlord’s claim for unpaid rent by relying on the lease’s force majeure clause.
What is a force majeure clause?
Some contracts contain a force majeure clause that sets out what should happen when particular events occur that are outside the control of both parties.
Typically, a force majeure clause will state the particular events that may trigger the clause’s application. This often takes the form of a list of events plus a phrase that catches other similar events. The clause usually also sets out the impact that the event must have on a party’s ability to perform the contract before the clause will be engaged.
A force majeure clause will also normally state the effects of the unexpected event and the inability to perform the contract. The clause might allow a party to terminate the contract, but it could impose another remedy short of this.
The effect of a force majeure clause depends on the specific terms used
The force majeure clause’s specific wording is important when assessing the impact of an unexpected event on the contract. Whether a particular event triggers the application of the force majeure clause depends on its terms. Similarly, if an event triggers the clause, the impact of the clause on the contract also depends on the specific wording used.
It is important to seek advice from an experienced commercial lawyer to understand the impact of unexpected events on your contractual rights and obligations. In addition to a specific force majeure clause in the contract, other laws could impact a situation, such as the common law doctrine of frustration.
Initial COVID-19 lockdown resulted in rent relief agreement
In the case of Niagara Falls Shopping Centre Inc. v LAF Canada Company, the plaintiff purchased a shopping centre in Niagara Falls in 2019. It inherited a pre-existing commercial lease with the defendant tenant, who used the premises as a health and fitness club.
In March 2020, the Ontario Government declared a state of emergency due to the COVID-19 pandemic and it mandated the closure of non-essential workplaces, including the defendant’s business.
A couple of months later, the parties reached an agreement whereby the defendant was not required to pay 50% of the base rent under the contract, and deferred another 25% of the rent from April to June 2020. The defendant paid the rent until the end of 2020, despite only being able to reopen subject to a capacity limit.
Defendant stopped paying rent after subsequent lockdown
After the Government imposed another lockdown in December 2020, the defendant stopped paying the rent.
The plaintiff sued and the defendant counterclaimed, arguing that it did not need to pay rent in a lockdown and that the rent was reduced when capacity limits applied. In part, the defendant relied on the lease’s force majeure clause, which stated:
“If either party is delayed or hindered in or prevented from the performance of any act required hereunder because of … restrictive laws … or other reason of a similar or dissimilar nature beyond the reasonable control of the party delayed, financial inability excepted (each, a “Force Majeure Event”), … performance of such act shall be excused for the period of delay caused by the Force Majeure Event and the period for the performance of such act shall be extended for an equivalent period … Delays or failures to perform resulting from lack of funds or which can be cured by the payment of money shall not be Force Majeure Events.”
Court of Appeal decided that the defendant had to pay rent during the closures
The parties agreed that the force majeure clause was triggered because “restrictive laws” prevented the plaintiff from providing premises for use as a fitness club. The defendant argued that the clause required the lease to be extended, and further, it was not required to pay rent during such extension.
The Court of Appeal decided that the defendant was required to pay rent during the closure periods because, while its ability to pay was hindered during closures, this was not because of a “Force Majeure Event”. It was rather because of “financial inability” or a “lack of funds” due to not requiring its members to pay their membership fees.
Court also declared that the lease was extended to account for the closures
However, the Court of Appeal decided that the force majeure clause only “excused” the landlord’s failure to provide the defendant with the premises during the closure periods. The clause did not exempt the plaintiff from having to perform the contract and due to the period of performance being extended “for an equivalent period”, the clause required the lease to be extended by a period equivalent to the government-mandated closure periods.
The Court held that the defendant did not need to pay rent during this lease extension period.
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