3. Timing is everything. Consider making performance contingent of the parties giving each other notice of a potential delay due to a force majeure event. Be realistic about the time frame, as well as be specific about the scope of the interference necessary to claim a force majeure delay. In other words, how affected by the event was the party who is making the claim of non-performance? You will also need to consider whether you want the provision to be tied to one or all of the performance provisions (e.g., due diligence inspections, the closing date). Also, consider what the penalty will be to claim a force majeure event. Do the parties anticipate allowing for a complete excuse from performance, or a only delay in the transaction timing? My experience is that many counsel have agreed (as supported by their jurisdiction’s law) that excusing performance is necessary if it is commercially impracticable, the purpose of the contract has been frustrated, non-compliance would be advisable under the law, impossible, or outright illegal (e.g., in the event of a moratorium). Additionally, as noted in the paragraph below, you may want to consider whether the event stigmatizes the property as grounds for excuse from compliance.
4. When does a force majeure event create a stigma for the property, and can that excuse performance? Some transactions can be affected by force majeure events that could materially affect the value and proposed use of the property. Take for example, a situation where a major earthquake occurred in an area that has not had an earthquake for many tens of years (often such events are referred to individually as an “Act of God”), and the property was not necessarily in an area mapped for that type of seismic activity. The subject land housed an income-producing winery and vineyard operation, several historic buildings were damaged, and a few lives lost. Initially after the event, the desirability of the property plummeted for the buyer and its lender. Having a robust and enforceable force majeure provision in the purchase contract would have been helpful in excusing performance for this buyer. As luck would have it, it turned out that the lender was anxious to make the loan given its substantial relationship with the buyer/borrower, and was satisfied that the existing earthquake coverage and business interruption insurance would cover the losses. However, you don’t want to be in the position of advising a client about the lack of options, particularly if the client perceives or believes that the property will never be restored to its former significance or be pegged the potential stigma of recent human casualties.
5. Now that something bad has happened, how bad was it really (i.e. foreseeable), how do you help your client cope, and what is your role? In a dispute about performance, most triers of fact will look to determine the foreseeability of the event. Additionally, the party brining the action to either delay or void the contract carries the burden of proof that the event was not foreseeable. It is difficult to prove impossibility to excuse full performance, rather than just a delay in performance. The current Covid-19 pandemic is likely to be considered an unforeseeable event given its foreign origins and novel pathology. As I write this, we are seeing contracts of all types stall in mid-transaction. It doesn’t appear due to a lack of desire to consummate the transactions contemplated by the parties, but rather is due to the sheer scope of the pandemic, and the loss or temporary stoppage of vital personnel and services to keep the transactions moving along. It is proving that logistics will be the biggest impediment to keep the wheels of commerce rolling. It is too early to gauge the ultimate impact on real estate transactions. Much will depend on the services of other people supporting the transaction, such as architects, contractors, material men, inspectors, service contractors and lenders. However, as counsel to our clients, we will need to advise them through a minefield of logistics to either maintain the transaction, or to guide them to the sidelines.
6. Addressing the unforeseen event with resilience. Draft force majeure provisions with precision and think about how far that definition can be stretched to include all types of events that would lead to classifying the property as stigmatized, such as highly improbable death events, pandemics arising from novel diseases or viruses, or even alien invasions of all kinds. You will want to advise your clients on hedging or mitigating certain risks with insurance and resilience measures. If your clients are already involved with Energy Star or LEED certifications, they will already be somewhat or well versed in sustainability theories on resilience, resilience programs and their application to property construction, management and operation by their association with USGBC, UBCI and other similar organizations. In short, expect the unexpected, and chalk it up to resilient clairvoyance.
Loretta Thompson, Esq., is a partner with the real estate practice group at Greenspoon Marder LLP.