Why many commercial tenants add force majeure clauses to their leases

On Behalf of | Apr 19, 2024 | Commercial/Residential Leases

Negotiating a commercial lease is a massive undertaking. The terms included in the lease can affect a business for years to come. After all, commercial leases tend to last for longer than residential leases. Frequently, businesses have to commit to multi-year leases, with terms averaging between two and five years. In some cases, leases run for far longer than that.

Committing to rent payments for many years means gambling on the likelihood that a business succeeds. There can be major issues if the business fails or struggles to generate revenue. Landlords can often demand payment for commercial rent even when a tenant no longer operates a business in that space.

Some business owners protect themselves and the businesses they start from future challenges by negotiating terms that allow them to assign the lease to someone else if the business cannot use the space anymore. Others reduce how long the lease is effective to a year or even less. Other times, a force majeure clause can be a viable way to limit the degree of risk inherent in signing a new commercial lease.

What is a force majeure clause?

The term force majeure is French, and it refers to a greater power. In the context of a commercial lease, a force majeure clause addresses a scenario when powers outside of a business’s control prevent it from continuing to operate. Natural disasters, international supply chain disruptions and terrorist incidents could all potentially trigger force majeure clauses.

These clauses allow for the cancellation of a lease or possibly the temporary cessation of financial responsibilities when a business must cease operating due to unforeseeable and uncontrollable circumstances. Force majeure clauses can allow a business to limit financial losses during a time of hardship. It may be possible to close certain locations or facilities to keep the overall organization solvent in the long run. Other times, a force majeure clause is a way of limiting the total losses generated when a business fails.

Landlords may also drive a degree of protection from force majeure clauses. They can avoid scenarios where they face legal action for failing to provide space or maintenance services due to factors outside of their control. The potential for mutual benefit might help a prospective commercial tenant convince the landlord to agree to add a force majeure clause to a new commercial lease.

Taking the time to review and customize commercial leases can be beneficial for new or expanding companies that might be unable to absorb the costs of years of rent if something happens to the organization. While those preparing to expand to new facilities typically assume that their company will continue to grow and thrive, it is often best to include details in a contract that protect against the worst-case scenario and unpredictable circumstances.