Why force majeure clauses in leases are crucial amid tariff uncertainty

Business Journals

4 hours ago

The only certainty businesses can rely upon from the current administration's trade policies is, well, uncertainty.
On Inauguration Day, President Donald Trump announced across the board 25% tariffs on Canadian and Mexican imports. Six days later, 25% tariffs on all Colombian imports. In response, Colombia retaliated with 25% tariffs on U.S. goods. Since then, the tariff whiplash ride has continued, including tariffs on Chinese imports and steel and aluminum imports, among others, as demonstrated in this timeline.
Amid the fluctuation, national and global economic markets are reeling from the same levels of angst and inability to plan as were experienced during the pandemic and supply chain issues of 2020. During those chaotic times, companies sat on their cash and assets, not knowing what to expect or when the markets would normalize or return to their previous levels. For various reasons, but mainly due to governmental regulations mandating the closures of certain non-essential businesses, many companies closed their doors, stopped operating, or required their employees to work from home.
Given the unprecedented nature of these events, many companies looked at the force majeure provisions of their leases to justify reducing or ceasing their rental payments for facilities that they were either unable or unwilling to use. Lawyers representing both landlords and tenants were hyper-focused on reviewing their force majeure provisions. These 'miscellaneous' provisions, generally relegated to a quick check to make sure they were in the lease, were now being given the same level of substantive review and scrutiny typically reserved for rent tables.
The results of this exercise (and the resulting court cases) are polished force majeure clauses that very specifically and expressly list governmental regulations and ordinances imposed due to epidemics or pandemics as specific force majeure events, clarifying with even greater detail that any such events of force majeure do not excuse a tenant's obligation to continue to fulfill its financial obligations under a lease (specifically a continued obligation to pay rent). Such clarification is now so common that any attorney representing a landlord who fails to include such express language in its force majeure clause runs the risk of being on the losing end of a malpractice claim.
The unrelenting and pervasive uncertainty surrounding current trade wars presents another opportunity to shine up that recently polished force majeure clause to address the newest force majeure event: the effect of tariffs on the reduced availability or the prohibitive costs of equipment and materials.
Many well-drafted force majeure clauses may already have the unavailability of labor or materials listed as such an event of force majeure. However, just as many fail to list such an eventuality at all — and even fewer mention anything directly about the influence and impact of trade wars and tariffs. Although many companies have stockpiled equipment and materials to get ahead of any increased cost of imports, those stockpiles will eventually be depleted. Once replenished, to maintain operating income, many businesses will be forced to either replenish such items at a higher cost, which will likely be passed along to consumers, or maintain a lower inventory, resulting in shortages of certain materials. Combine these higher prices and inventory shortages with the very common buildout requirements of almost every lease and you have a brewing performance and delivery issue that must now be addressed.
The majority of leases that contain either a landlord or tenant build-out also contain some deadline by which such work must be completed. Failure to meet such deadline is usually remedied by some offsetting free rent or possibly an ultimate right to terminate. The current issue now becomes one of timing. Although you may currently be negotiating the terms of a lease and may be looking at the current costs and availability of equipment and materials to complete the build-outs, it normally takes some additional period of weeks or months before that lease gets finalized and signed. That build-out will not begin until the lease is signed, and then that build-out deadline will be some number of weeks or months after that. Therefore, you may be moving forward under the assumption of current equipment availability and cost to meet timeline obligations; however, it is important to instead consider (and somehow divine) the availability of those items months from now. As noted above, those costs and availabilities are probably going to be worse than they are today. However, given the seesaw nature of these 'on again, off again' tariffs and levies, it has become almost impossible to predict which products will be affected, when, and by how much.
How do you protect from these uncertainties? By expressly stating in your shiny and newly polished force majeure provision that these items are uncertain and beyond control, and by adding them to the specific list of force majeure events that excuse or delay a party's obligation to perform. You then also make sure that you expressly carve out force majeure events from your obligation in the lease to complete that build-out by any date certain.
Get ahead of this issue and make these changes in your base lease forms now, and when those equipment shortages and exorbitant prices start kicking in, you'll be covered and thankful that you did.
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Marc A. Angelone is a real estate partner at Hinckley Allen and co-chair of each of the Retail Group, the Industrial Group and the Real Estate Healthcare Group. His practice involves all aspects of commercial real estate, including development, lending, leasing, acquisitions, and sales. He represents developers, institutional property owners, and lenders in the acquisition, disposition, and financing of office, industrial, research and development, and multi-family properties, as well as both landlords and tenants in various commercial leasing transactions. Prior to practicing law, Angelone served as an officer in the United States Navy.