Publications + Presentations

Summary:

• Reciprocal tariffs create uncertainty and potential disruptions in business operations, such as increased costs and supply chain delays.
• Tariffs raise costs for imported goods, impacting operating expenses; businesses should review lease clauses to manage these increases.
• Inflation from tariffs may lead to rent adjustments; businesses should check CPI-tied clauses to prepare for potential changes.
• Tariffs can affect insured asset values and disrupt supply chains; businesses should review insurance and force majeure clauses to ensure adequate coverage and flexibility.

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With the on-again, off-again nature of President Trump’s reciprocal tariffs causing uncertainty and speculation across markets, planning for potential disruptions would be in any business’s best interests. Whether those disruptions come in the form of increased materials costs, supply chain delays, inflation, or otherwise, businesses should prepare for changes in their operations by reviewing their lease.

There are a number of clauses that could come into play when a business is disrupted by tariffs. Therefore, both landlords and tenants should review these clauses carefully to best understand their rights and obligations in the context of changing economic conditions due to tariffs.

Operating Expenses Clauses

Tariffs increase the cost of imported goods, such as maintenance supplies, construction materials, and other equipment used in maintaining or operating commercial spaces. This increase in cost has the potential to impact businesses across industries, negatively affecting tenant improvement allowances, increasing the cost of goods used for common area maintenance in corporate offices, and leading to higher operating expenses for properties.

Whether a lease includes clauses for operating expenses or common area maintenance (CAM) charges, landlords may want to adjust or renegotiate their amounts, while tenants should be aware of the potential for their share of these costs to increase if a tenant was not able to initially negotiate a cap on their share of operating expenses or common area maintenance.

Rent Adjustment Clauses

Tariffs can lead to inflation, increasing the cost of goods and services across the economy, which may necessitate rent adjustments that similarly impact businesses across any and all sectors. If tariffs lead to significant inflation, a rent adjustment clause might allow for renegotiation, or even termination if the new rent terms are not acceptable to either party.

The clause should outline how rent adjustments are calculated and the conditions under which the lease can be terminated, and should be reviewed by both parties. Some of these rent adjustments are directly tied to the Consumer Price Index (CPI) and therefore follow inflationary or deflationary trends. Landlords should consider including rent adjustment clauses that account for inflationary pressures, while tenants should be reviewing for price certainty in their leases or preparing for potential rent increases.

Insurance Clauses

Trump’s tariffs target almost 100 countries and have the potential to increase costs on a significant number of imported goods and products. These increases could have an equally significant effect on the overall value of insured assets in warehouses, retail stores, and other locations that stock and store products.

Both parties should review their lease’s insurance clauses to double-check any insurance requirements and ensure adequate coverage for increased asset values due to higher costs.

Force Majeure Clauses

If a lease required the landlord or the tenant to complete certain improvements by a specific date, but tariffs suddenly disrupt the supply chain and delay the party’s ability to obtain the necessary materials, a force majeure clause could allow that party the ability to extend the deadline without penalty.

Force Majeure Clauses protect parties from being held liable for non-performance due to unforeseen and uncontrollable events. They help manage risk and create flexibility, allowing for adjustments in lease conditions or even termination in the event of a business’s inability to perform. While force majeure clauses are usually thought of in terms of natural disasters, they were most recently utilized during the COVID-19 pandemic. There is an argument that these clauses also include significant economic disruptions like tariffs, as they cause sudden disruptions to supply chains and delays in everything from construction to the delivery of goods, materials, and products that businesses need to operate.

Both parties should review their lease’s force majeure clauses to understand their rights and obligations in the event of tariff-related disruptions. A lease might specify the types of events considered as force majeure and outline how and when the tenant must notify the landlord of the event and its consequences, which could be anything from extending dates to terminating the lease. In the wake of the COVID-19 pandemic, some parties specifically negotiated to exclude force majeure as a defense to performance under a lease.

Termination Clauses

While force majeure clauses often provide temporary relief or solutions to a broad range of unforeseen events, termination clauses result in the permanent end of the contract and are more specific, detailing specific conditions needed to end the contract. While termination clauses are very rare in lease agreements, if either party holds a termination right the impacts can be immense.

Since significant tariff increases can lead to financial hardship, they have the potential to trigger termination clauses in leases. These clauses could cover issues related to material adverse changes, changes in laws, and economic hardships that make a business incapable of continued operations.

The increase in costs or disruptions in supply chains might also be considered a material adverse change. A Material Adverse Change (MAC) clause is a provision in a lease or contract that allows one party to renegotiate (or even terminate) the agreement if a significant negative change occurs that affects the other party's ability to fulfill their obligations. In a commercial lease, if new tariffs drastically increase the cost of imported goods necessary for the tenant's business, the tenant might seek to terminate the lease under a MAC clause.

Similarly, a Change in Law clause can allow for a lease’s termination if the new tariffs make the lease economically unviable. And although tariffs are often the result of new laws or changes in existing laws, the clause should specify how changes in laws, including tariffs, will be handled and what steps need to be taken to terminate the lease.

Some leases may also include Economic Hardship clauses, which could allow for termination if economic conditions change drastically, making it impossible for one party to continue under the original terms, such as if their company’s supply chain becomes too expensive to continue operations due to tariffs. This clause should detail what constitutes economic hardship and the process for termination.

While, again, a termination provision would be rare, both landlords and tenants should review their lease’s termination clauses to understand the conditions under which the lease can be terminated due to any economic changes caused by tariffs.

Reviewing Your Lease

Along with defining a clause’s scope, triggering events, burden of proof, and other key aspects, any review of a lease should include any notification requirements, especially those surrounding how and when the other party must be informed of the intent to terminate. Whether that intent comes from the landlord or tenant, both parties should understand their obligations to mitigate damages, whether they are seeking to renegotiate or terminate due to economic changes caused by tariffs. Consulting with legal counsel can also help both parties navigate the complexities of their lease’s clauses and ensure that their interests are protected in the face of any economic change.

If you have any questions or need further assistance in navigating the complexities of your lease in light of recent tariff changes, please contact Erica Kaple for personalized support and guidance.