Two days ago Virginia’s Governor, Ralph S. Northam, issued an Executive Order directing non-essential businesses to cease significant operations through April 24, 2020. Businesses that are explicitly restricted from operation include food and beverage, recreational and entertainment, and non-essential retail businesses. All others were directed to limit gatherings to no more than 10 individuals per establishment. As a result, the commerce in Virginia has come to a screaming halt, as it has in the rest of our country.
While we all wait to see what the effects of the $2 trillion emergency relief package recently passed by the United States Senate may be, small businesses without sufficient cash flow are forced to make decisions on whether to remain in operation and where to spend their limited funds.
As many businesses have scrambled to stay afloat by arranging for alternative operation and remote work, those less fortunate inevitably face financial turmoil that may prove insurmountable. Overhead costs such as payroll, insurance, rent and utilities all need to be addressed, which has forced many to close their doors indefinitely – or at least until they have more clarity on what they face.
Unfortunately, while operations (and profitability) are put on pause, executives continue to feel the pressure of keeping up with financial obligations that put the future well-being of their business in jeopardy.
Fortunately, for businesses operating under a commercial lease, contract law may provide some much needed relief.
Typically, a commercial lease for office space is entered into for a term of months or years. Their terms routinely require payment of rent for an initial defined term as a baseline obligation. While some may be able to pay rent and come out unscathed if this pandemic is occurring towards the end of their term, others who are dealing with this at the beginning of their lease term may end up owing several months (or even years) of rental payments they cannot make.
Absent a legal excuse to “break” their lease, these small businesses will be forced to attempt to obtain alternative financing, negotiate for a deferment, risk a court-ordered judgment for money – likely to be followed by a collections suit and negative credit actions, or bankruptcy. None of these options are particularly attractive to someone who has been ordered by their government to close their business and stop making money.
Small businesses considering these options should immediately consult with an attorney to review their commercial lease.
To start, many commercial leases contain a “force majeure” clause usually located towards the end of the document with other general, boiler-plate terms. A force majeure clause is meant to address situations where an unforeseeable circumstance – usually out of anyone’s control, i.e. an “Act of God” – prevents a party from fulfilling their contractual obligation. Depending on its language, the clause may provide small businesses with a legal excuse from paying remaining rent, otherwise due under their lease. While many leases include carve-outs for payment of rent, it is certainly worth consideration.
Additionally, even if a commercial lease does not include such a term, the common law might still provide small businesses with a remedy. Under the “impossibility of performance” doctrine, where the performance of the contract becomes impossible by reason of an act of God, or of the law, a breach of contract is excused, as a general rule. Given the current state of affairs, many small businesses who cannot continue to pay rent because of Governor Northam’s Executive Order may have legal excuse for nonpayment, regardless of the contractual language.
While both legal excuses discussed above potentially allow small businesses to relieve themselves of rent obligations, it is important to remember that legal justifications to break a contract are the exception, rather than the rule. Legal opinions as to whether or not one of these excuses will apply in a given situation requires extremely fact-specific legal analysis. As such, it is imperative that decision makers consult with counsel before taking these positions, or depending upon them in a given scenario.
If you are interested in obtaining legal advice given your current scenario, please reach out to one of our business attorneys at Surovell Isaacs & Levy PLC by calling us at (703) 251-5400 or email to TBlaser@SurovellFirm.com.
Posted in: Business Law