Forced closures, quarantined customers and an unknown future can make this feel like a dystopian future no one could imagine just a few days ago. Unless you are in the toilet paper or ammo business, this may feel like the worst week of your business’s life. However, just like Dorothy’s ruby slippers in the Wizard of Oz, you may have some tools to save your business from the Corona Crash of 2020. Below are three things you may have overlooked that could save you a ton of money and perhaps your business.
A force majeure (“superior force”) clause in your lease or other important contracts is often overlooked as “boilerplate” or missed altogether. However, these clauses may be critical to keeping your business afloat during an unexpected crisis like we are seeing today.
These clauses basically say that if something awful and beyond a party’s control happens, they are excused in some way from performing some obligations (like making payments). For example, a force majeure clause might say you don’t have to pay rent, which would be pretty handy if the Governor just ordered your business closed. People often (mistakenly and frustratingly) refer to these types of clauses as “boilerplate” because they do not deal with the economics of the agreement and often are in the “Miscellaneous” section at the end of the document along with other yawners like “Choice of Law” and “Dispute Resolution.” That stuff is boring if you never have to consider it but a) many but not all leases have it, and b) they do not all say the same thing. If you have one or more leases for a brewery, restaurant or just about any hospitality venue, you should go read your lease and see if you have this clause (sometimes called “Acts of God”). Furthermore, they do not all say the same thing. Each clause may define what qualifies as a “Force Majeure.” Consider these two examples below (both from real commercial leases involving large companies):
A. FORCE MAJEURE CLAUSE. The parties hereto are relieved of any liability if unable to meet the terms and conditions of this Agreement due to any “Act of God”, riots, epidemics, strikes, or any act or order which is beyond the control of the party not in compliance; provided that it takes all reasonable steps practical and necessary to effect prompt resumption of its responsibilities hereunder.
B. FORCE MAJEURE CLAUSE. Wherever there is provided in this Lease a time limitation for performance by Landlord of any obligation, including but not limited to obligations related to construction, repair, maintenance or service, the time provided for shall be extended for as long as and to the extent that delay in compliance with such limitation is due to an act of God, governmental control or other factors beyond the reasonable control of Landlord.
Can you see the difference? The first one (A) is “bilateral,” meaning that either of the parties “are relieved of any liability” based on their failure to perform due to “Acts of God,” which expressly includes epidemics. In sharp contrast, B only applies to the Landlord’s obligations and does not expressly include epidemics (even though it has the broad “beyond the control language”). Which is better? It depends, in this case on what side of the contract you are on. B is a better clause for the Landlord and we can assume that this one was either in a stronger negotiating position or understands how important and customizable a “boilerplate” clause might be. As lawyers, people often ask to create or review a boilerplate contract. Since we can’t see the future (who would be practicing law if they could?) we do our best to think these things through. I am going to bet that the next ten years will see more force majeure clauses than the 20teens. If you have a lease, distribution, royalty or similar agreement, go look at it to see if it has this kind of clause and have your attorney help you evaluate how it can help you.
BUSINESS INTERRUPTION INSURANCE
If you own or run a small or medium business you likely have at least some Business Interruption Insurance (“BII”) as part of your general business owner’s policy. Unlike property insurance, BII generally covers lost income based on some covered event. While many small businesses have some BII coverage it is also not boilerplate. As described in this excellent and timely article from Workfest, since the insurance industry paid millions after the SARS epidemic, most modified their policies to limit covered events to losses caused by physical damage like a flood, fire or asteroid strike that shuts down a business until it can rebuild. Potentially, your policy could cover you for a leaking HVAC unit that makes a room unusable but not for a pandemic that eliminates all customer visits. You can buy riders for infectious diseases, but that may be limited to certain “trigger dates” when the CDC, for example, would provide notice, or some governmental authority shuts down certain businesses. This kind of coverage could also affect landlords as an event like this will interrupt their businesses. Imagine building or redeveloping a project with tenants set to move in in the spring of 2020.
Think of the crisis like a stream. Your customers are “upstream” from you. If they don’t buy from you there is no money to pay your vendors, lenders, and landlord, who are all downstream from you. They know that. We are all in the same pandemic boat. In the landlord example, they may have legal rights to terminate the lease, accelerate payments and collect on a personal guarantee, but imagine being in their shoes. Terminating a lease and collecting on a personal guarantee is not without cost in terms of time, money and stress. Furthermore, in this environment, the landlord may just wind up with an empty building, no prospective tenants, loan payments and nothing to tell lenders and investors. Finding a new tenant can take months (or years in this environment), and requires significant TI expenditures, commissions, and legal fees. Instead, smart tenants will call up their landlords and see if they are willing to help. You could start by asking to skip or defer rent payments, or by paying some fraction of your monthly rate as long as the pandemic continues. There is no guarantee that the landlord (or other contract parties) will be receptive, and you should be careful when you approach them, but communication is often appreciated in times like this. Furthermore, your lease or contract may have other provisions that will at least enhance your negotiating position.
Few if any of us have ever seen a situation like the one we are in today but know that acting rather than just waiting almost always gives better results. Look at your contracts, get in touch with your landlord and other parties you need to pay, and speak with your advisors. Not covered in detail here are how to protect yourself if you have a significant debt personally guaranteed, and how to talk to your landlord or counterparty without breaching the lease or contract. We can save that for another post or a direct conversation.
This Blog used with permission of author: Seth Gardenswartz of Blackgarden Law