March 18, 2020

Coronavirus and the Interaction with Force Majeure Provisions in Real Estate Contracts

The COVID-19 pandemic is disrupting the world's economy in ways that were unimaginable a few weeks ago. Will this disruption excuse you or your counterparty's contractual rights and obligations under real estate related contracts? The answer may depend on the presence (and specific wording) or absence of a force majeure clause.

Force majeure is a centuries old concept that excuses contractual performance due to events beyond the control of the parties. Force majeure clauses are typically found in construction contracts and construction loans, and they also appear frequently in almost every type of real estate related contract. These provisions do not typically alleviate the performance of financial obligations. For example, parties still have to make rent payments under commercial leases.

All parties should take the time to revisit these definitions within their existing contracts to see if they are protected from the ramifications of the COVID-19 outbreak. Do your force majeure provisions account for government imposed closures and moratoriums? Do the force majeure provisions reference a public health crisis? Do your agreements address the impact of supply chain shutdowns or limitations on traditional forms of transportation? Is there anything within your force majeure provisions that could be construed to address pandemics or the impacts of social distancing? While revisiting the force majeure language, certain parties may also want to review their business interruption insurance policies to determine if they may be entitled to any financial relief The availability of such insurance coverage may prove critical to certain businesses as the consequences of this outbreak to our daily life continue to unfold.

For those parties that have expressly included force majeure provisions within their contracts, courts have generally construed such clauses narrowly to provide remedies only for the specific events or situations referenced in the contract. To the extent that two parties to an agreement did not explicitly incorporate such a clause, courts generally will not provide the rights afforded by a force majeure provision. In certain limited circumstances, however, a court may apply the doctrine of impossibility. As the name of this doctrine implies, the performance of a party may be excused in certain extreme situations that were not contemplated in the contract. For example, if a contractor agrees to pay an electrician $100,000 for work within an apartment building, but before the electrician begins the work the building burns down, a court could imply the doctrine of impossibility to terminate the parties' obligations under the agreement.

While the doctrine of impossibility may give some level of comfort to parties without force majeure provisions in their contracts, all parties should make an effort to address risk mitigation issues prior to entering into any agreements. Now may also be a good time to carefully consider whether to incorporate force majeure clauses into agreements that typically have not included these provisions. For example, under typical purchase and sale agreements, buyers of commercial real estate in our current environment may not be able to sufficiently perform their due diligence on a target property because their employees and third party service providers cannot travel to the site. Having a force majeure provision in a purchase and sale agreement could afford buyers an extended period of time to complete their diligence. This extension of the diligence period would benefit buyers as an alternative to terminating the agreement. At this point in time, we all face a great amount of uncertainty with respect to the social and economic impact of the COVID-19 outbreak; however, over the coming days and weeks, all parties in the real estate industry should be prepared to assess the effects of this situation on their contractual relationships. We at Goodwin are here to support our clients and everyone in the business community during these challenging times.