Landlords, Developers, Tenants Evaluate 'Force Majeure,' Other Contract Concerns
This episode of Point By Point was produced prior to the combination of Waller and Holland & Knight.
COVID-19 has created a great deal of uncertainly for commercial real estate landlords, owners and tenants alike. It's also left many looking at their contracts and leases to see what they may or may not be responsible for amid a global pandemic and whether "force majeure" is applicable. Waller attorneys Joe Watson and Lida Alsobrooks tackle these questions and many others to help everyone understand where they stand with leases, contracts and other agreements.
Morgan: This is Morgan Ribeiro, the host of PointByPoint. On today's episode, I am joined by Lida Alsobrooks and Joe Watson. Lida is a partner in Waller's real estate practice group and co-leads our multifamily sector team. Joe is a partner in Waller's litigation and dispute practice group and focuses his time on construction-related matters. Lida and Joe, I'm really looking forward to today's discussion and appreciate you joining me.
As many businesses have closed their doors in response to the coronavirus pandemic, business owners are reviewing their contracts to see what rights they have. And COVID-19 has had a particular impact on the real estate and construction industry, specifically, developers and those who are looking at their commercial lease arrangements. And so I’ve asked Lida and Joe to join us today to speak specifically about contract provisions and a term that keeps popping up, seems like everywhere we look, about force majeure clauses and steps that business owners can take to safeguard their assets. To start, Lida, can you give us a general description of this legal term that we seem to be hearing a lot about recently, and that is force majeure.
Lida: Force majeure, which is actually the French for superior force, is defined as an event or an effect that can neither be anticipated nor controlled. We typically see this term interpreted as including acts of nature or acts of God, such as floods and hurricanes, and acts of man such as riots, strikes, terrorism and wars. Although it can encompass a lot of different terms and we'll get into that later. Force majeure contracts are clauses in contracts that allocate risk between parties in order to discuss performance under those contracts, and specifically when that performance becomes impossible or impracticable because of an event or an effect that cannot be anticipated nor control.
They're seen in all different types of contracts. These causes are specifically in real estate documents that I deal with a lot. We see them a lot in leases and loan documents. The contracts typically suspend performance or extend delays within those contracts. Typically, we have not seen these clauses used to excuse payment of money, so under a lease, we typically don't see them used to excuse payment of rent, but might be delaying the opening date under a lease or something like that. Although it's completely negotiated between the parties and can be used to even terminate a contract. Without a force majeure clause in a contract, the parties have to rely on the common law doctrines of frustration, of purpose or impracticability. Joe, do you have anything further to add?
Joe: In the construction context, to piggyback on what you said that they’re typically the remedy under a force majeure provision, assuming that it's applicable, which we'll get into here in a little bit, I'm sure. It is an extension of time. If the parties have agreed that there will be additional compensation for the project getting extended because of a force majeure provision, then that's rarer. But typically the extension of time is the remedy that a party would get if a force majeure provision is implicated by circumstances.
Morgan: How many of your clients that are asking you questions about force majeure actually have these clauses in their contracts? Is that more frequent, or is it more frequent that they don't have these clauses in their contracts?
Joe: We typically, our deals, will start with these templates and then, of course, we’ll modify them for the circumstances and the client's needs for a certain project. But the force majeure, at least in the construction context, is a standard type of clause. And as we'll talk in a second, there's not really a standard force majeure provision. They don't all say the exact same thing. But there are variations of force majeure clauses in almost every contract that we see, and certainly in the ones that we put together for our clients.
Lida: Exactly. That's the same with us on the real estate leases that we deal with. Almost every single one, especially the ones that we negotiate and draft, have these provisions. I will say that while we have focused on them that they have not had as much scrutiny in the past 10 years or so as they're getting right now, because this is definitely a unique situation that we're in. And typically we've seen it where there were acts of God, such as flood, hurricane, stuff like that. A public health crisis is something that we haven't seen spelled out in all of these force majeure contracts, and that's what makes this all very interesting as to whether there is this kind of catch-all phrases within the definition of force majeure in our contracts right now that could be used to kind of catch this exact situation.
Morgan: That's really interesting. Also along those lines, I think that's a good segue into what is typically included in these force majeure contract clauses? Joe could kick us off on that one.
Joe: Yeah, I think that the answer to that question is why there's so much scrutiny and such a big interest in these force majeure issues by our clients, because there isn't a one size fits all force majeure provision. They're all very different, depending on the contractor looking. All the clients want the answer to the question, hey, is my force majeure provision going to protect me? Do I have some arguments here? And they don't love this answer. But the answer always says where we're gonna have to look at your contract.
So, ironically, the word force majeure may show up in the heading of the contract provision, but rarely are, at least oftentimes, the words force majeure are actually not even included in the provision itself, so the two main types of documents, or at least the industry standard documents that we use and that is very common in the construction industry are the AIA, it's the architects’ sort of industry documents and the ConsensusDocs documents. So I pull provisions from those. And just as an example here, the AIA provision, the language it uses, says labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions or other causes beyond the contractor’s control. That last provision or the last clause there, “beyond the contractors' control,” you know, that's kind of the catch all, but, you look at that definition, and it's pretty broad. The other document, the ConsensusDocs, it also kind of uses that language beyond the control of the contractor and then lists a litany of examples: labor disputes, terrorism, epidemics, which obviously is relevant here, adverse governmental actions and several others. So in looking at those and then looking at some other contracts, just in preparing for today, “beyond the party's control” seems to be the most common phrase that is showing up in these provisions.
So you know that's not the answer that the clients love. But it really does depend on what your contract says. And under both of these provisions, think you would have a really, really good argument, especially the one saying epidemic. So maybe a pandemic doesn't qualify, I guess a good lawyer could make that argument. But I think you would have a really strong argument that under both of these provisions that what we're going through now, what would absolutely give grounds to a delay or an extension or whatever other remedy is called for under the contract.
Morgan: Great, and Lida from your perspective, working on more of the real estate side and representing real estate developers, do you find the same things?
Lida: The contracts themselves are negotiated between the parties, and so we have seen it encompass any sorts of different terms, definitions in it. As Joe pointed out, it is interesting that that actual term force majeure is practically never actually used in the clause itself, which is very interesting in itself. But the key is, has the performance become impossible or impracticable, and you have to find that causal link between that event that's listed in your contract and the client’s failure to perform under the agreement.
Morgan: Well, it seems like so many things related to this pandemic are, there's a lot of “it depends” and a lot of gray area and a lot of room for interpretation. Lida, what if one of your clients that you review their contract and you find that it does not include a force majeure clause. Now what?
Lida: The first thing that we would do and the first thing we would recommend anybody do is to look through the entire agreement itself and see what other provisions are in that agreement that could help you. Just because it's not within the force majeure actual provision, there could easily be something built into the agreement to help in the event that you are unable to perform and give you a remedy or a solution or some sort of avenue to deal with the other side.
If you've gone through the contract and that's not in there, the next thing we would look into is, and what we have been doing with clients that have contracts like this right now, is starting a discussion with the other side, and what we're seeing specifically in leases are, let's say, for example, you have a retail lease right now and you’ve shut your doors and you're having problems paying rent or performing under the lease itself. This landlord likely has a lot of other tenants in the exact same situation. And they likely, if you think you're gonna be able to get up and running pretty quick here shortly, they don't want to lose you as a tenant. And so having a discussion with them, negotiate something, some sort of solution that might help. That discussion right now is with so many people in the same spot, landlords appear to be in some situations, willing to work with tenets is what we're seeing.
Morgan: It really seems like proactive communication could go a long way and that everyone is kind of stuck between a rock and a hard place right now and being able to have some productive discussion around what options are on the table would benefit everybody.
Lida: Absolutely. And I think the one thing that we needed, you know, the tenants are reaching out to landlords right now. We have seen that, and the other thing that we have to keep in mind is that the landlords, most of them, are beholden and to some extent, to their lenders. And so just because the landlord has, you know, a tenant comes to a landlord and requests some sort of assistance with rent or some sort of workaround solution temporarily, the landlord might not be able to, under the loan documents, absolutely say yes. And so that's the kind of rock and a hard place that we are right now is. Those landlords will then have to go to their lender and have discussions and see what the lender will be agreeable to. And so it is a long discussion when you have all these different parties involved. And so the earlier you can start those discussions and be open to multiple different solutions would be helpful.
Morgan: Joe, from your perspective, I mean, let's say that it doesn't include that clause right now. Could the contract be amended?
Joe: Yeah, absolutely. Of course, that's probably not going to help you in a current situation, that would help you going forward. So you know, absolutely. If you don't have a force majeure provision in there, I think that's something you would want to include if you could get an amendment. Alluding to what Lida said earlier, the last time that I really I had a force majeure issue was probably in law school. So even if you amended, I don't know if we're going to ever see the situation where this force majeure provision implicated for so long. It's been a provision in a contract that when you're putting these things together, you look over it, you see that it's in there and you really don't think a whole lot about it because it's never really been implicated ever, at least in my experience.
So, yeah, you want it in there if you get in through an amendment, but to Lida’s point, if you don't have it in there, it's really gonna become a creative job of your lawyers and of the client to see if there's other provisions and other ways in the contract that you can get what you're seeking. And from my perspective, in the construction context, it really depends on one, are we representing an owner, which that's the majority of our practice. But we also do a lot of work for contractors. So the goals and desires of the owners and the contractors are obviously gonna be different. And if you're an owner, are you trying to put the project on hold for good? Are you trying to pull the plug on the project altogether? For the contractor, are you seeking an extension of time? Do you want more money? So it really depends on what does your client, what are they trying to achieve? And are they wearing the hat of the owner or wearing the hat of the contract?
Morgan: Right. So assuming that the contract does have a force majeure clause in it, what impact are you seeing that have on business in the midst of the coronavirus pandemic.
Joe: It's been interesting for in the construction context, the current projects, there really hasn't been a really big difference. At least in Tennessee, that industry and those businesses are considered essential. There's really not been a huge sort of this massive, you know, projects just coming to a halt that we might have expected. Now if there are, if there's projects that involve materials, supplies and supply chain issues that kind of go outside of the borders of the U. S., there's been a little bit of, I wouldn't say panic, but just having to regroup and maybe getting some of those supplies and materials from other places within the U. S. And also just the logistics on the job site. We've seen clients having to adjust schedules and you know, you can't have 50 people working in a confined space like maybe you did previously. So some of those issues having to deal with, but not huge headaches.
I think that the bigger issue or the biggest differences will see our own future projects. And a lot of that comes down to lenders getting a little more nervous about lending and lenders having more stringent requirements for lending. And this kind of gets in the Lida’s world, especially for a lot of these commercial spaces. I think after this is all over, it's gonna be a different world. We've got all these buildings and you've got all this space, and we've seen here over the last month or two that people are figuring out ways to get work done and they're not sitting in their office. So because of that, I think people are a little nervous going forward of, you know, do we build all this space and maybe we won't.
So I think the biggest difference will be going forward and projects that maybe we're planning to go forward. Maybe they're a little slower to go forward. Maybe they don't go forward at all. It's hard to say, but I think there will be some differences of the construction world going forward as far as projects maybe not getting off the ground that that were planned to.
Morgan: Lida, from the real estate side, as you think about tenets and lease agreements, how do you see force majeure, particularly around this current pandemic, how that's impacting things?
Lida: It’s been interesting because a lot of these documents that we have that do have force majeure provisions don't necessarily have a provision in there that talks about a public health crisis. And so we're kind of at the point right now where, you know, we're looking at those clauses and the provisions to kind of do an analysis of, do we fall within that clause right now? And it depends on the type of business, really, and what the effect of this pandemic has been on them specifically. You know, we've got restaurants here in Nashville that have allowed to be open been right, but they can't have people in them, and so you can still do take out. So performance isn't necessarily impossible. Now, it's not what they expected when they signed up that lease, but they're still operating to some extent.
Then you have bars which have been completely shut down by the state and by cities. And so it's a little bit of been a different analysis, and I think it's gonna even become a more intense analysis as we start to reopen, because then the question becomes, you know, as we're reopening and allowed to be open, some businesses are choosing not to reopen for public health safety. Does that fall within a force majeure provision? You're allowed to be open, but you're choosing because of the safety of your clients. And so does that fall within that catch all of something beyond a party’s reasonable control? And so that's where I think as we'll talk about later, there's going to be some litigations and some questions will arise as to whether this event has really fallen within that force measure provision.
In the future, I think we'll see that a lot of negotiation around that clause in leases, in loan documents and other real estate contracts, from a landlord's perspective and an owner of a building's perspective really want to be careful as to nail down really what we mean by that force majeure event. And from a tenant’s perspective, they’re really gonna want to broaden that and add things like this that you know, public health, safety and certain regulations in the concept of guidelines versus restrictions, because there are a lot of guidelines right now that are being put out there by the CDC and other.
Morgan: And you've covered this to some extent, but what other kind of questions are you getting from clients as it relates to this? I would imagine you're getting, on the tenant side, it's can I delay my rent payment? And I'm sure that your clients who are landlords and owners of property have a separate set of questions. So any other things that you would add?
Lida: Yeah, absolutely. We're getting a lot of questions about, if it does, if we get, go through the analysis or make the argument that it is a force majeure event. A lot of questions are okay, well, what's next? And what is my remedy? And what does that allow me to do both from the landlord in the tenant’s perspective? And like you said, rent itself typically in these contracts cannot be postponed. So that's pretty standard and customary across the board. And so, then what's next? And you know what is being delayed?
The landlords were looking for how to enforce the provisions of the contract and make sure that the rent is being paid and make sure that they can make their loan payments and to protect their interest in the property. And so a lot of the questions we’re getting right now are surrounding what rights the landlord and the owners of these properties have. And even interestingly enough, a lot of the building owners have added in asking us, you know, do they have a right, you know, to kind of control access to their property. So can they shut down certain common areas and stuff like that within their buildings because of this event and public health safety? And so that's in a completely different analysis that we were going through and these documents that some landlords, you know, because typically these office buildings, like Joe mentioned, are open and allow their tenants to come in and occupy their space.
Joe: From my perspective, the owners we've had some owners, especially on projects, that maybe they're under contract and they haven't put the shovels in the ground yet, or they're just doing some of the preliminary site work. We've had some owners say, hey, do we have to go forward with this project? And the force majeure provision, even if they're in there, I don't think that’s the place to look. If you're trying to stop the project, for the project not to go forward. Those answers to those questions are going to lie more in your termination provisions and in the other types of provisions to basically cancel the contract. So it's a question that is a product of this COVID-19 and the stuff that we're going through, but it really is not a force majeure type answer is sort of the ironic answer to that question.
And then for contractors, the questions surround some issues and questions that arise of hey, do we have to keep working on this project? But the most frequent question we're getting is, hey, it's costing me a lot more to get these materials to the job site. The supply chain issues, the cost of maybe our source, that we were getting that overseas. We can't get it right now because of the circumstances, So it's costing us more to go get it somewhere else. Are we able to recoup these increased costs?
So once again, I think the force majeure provision typically is just going to give you an extension of time, at least the typical operation of the force majeure provision. So our counsel in those in those situations, it kind of goes back to one of the issues we talked about earlier. There's other provisions most often that you can kind of look to or try to rely upon in the agreements in the construction agreement for that type of situation. The contingency in savings clause, that are pretty common in these commercial construction contracts. A price escalation clause is another place to look that essentially says, hey, we're going into this price at the front end of the project. But if things happen and the cost of materials and supplies go way up, we're entitled to an increase in our contract price because we shouldn't be the one to bear the burden of that. So it's the same kind of questions that we're getting, it just depends on if they're coming from the owners or from the contractors, but everybody’s sort of interested in the same questions. Does the project have to keep going? And am I entitled to increase costs? Or you're the owner, do I have to pay these increased costs?
Morgan: Right, and we've talked a lot about the questions that we're getting and touched somewhat on the “now what?” So what recommendations are you making to clients, but also for them, sort of looking into the near future. So Joe, maybe piggybacking on that, do you have anything additional to say in terms of the recommendations that you’re giving to clients right now?
Joe: Yeah. The most of the immediate answer is always “what does your contract say?” You know, that's in any situation, any question we ever get. But that ultimately is where the answer lies is, what does your contract say. And then just sort of high level, I think what thE current circumstances have really highlighted are these best practices that we counsel our clients on, you know, every day of the year, all the time in normal circumstances. This sort of situation really highlights you really, absolutely need to do these things if you aren't doing them already, even though we're constantly on clients to do that, and those types of things are complying with your notice requirements. I know it seems very elementary. But when you've got a situation like this, where owners and contractors, depending on what side of the issue that you're on there looking for a way, maybe to not give you an extension of time, or they're looking for a way, maybe to not give you those increased costs of the materials. And if you don't comply with these very standard notice requirements that are in a contract, things such as if you want to increase in the contract price, you've got to submit a change order by this certain date or you've got to send it to this certain party at this certain address. I know it seems very elementary, but complying with the notice requirements in your contract is even more important in situations like this.
The other thing that really is kind of being highlighted now is you really need to understand where your project is financially. You really need to understand where you are. If you’re a contractor, where are you as far as your expenditures on this project and how much you've collected on this project, because if you're a contractor, you know a lot of owners right now may be in a tough spot with their lenders or that they don't have a lot of a lot of cash on hand because of what's going on. So you really need to understand, if you're a contractor, we use the turn getting out over your skis, meaning you've done a lot of work on a project and you haven't been paid yet. So very important to understand where your project is financially and if you're the owner having a good relationship and open the lines of communications with your lender. Because right now it's such a fluid situation, understanding the finances and sort of the money part of of the situation is critical.
Morgan: Lida, do you have anything to add to that in terms of what you're recommending to your clients?
Lida: I think Joe's absolutely correct, and I think the most important thing is to make sure that you're complying with the terms of your contract and reviewing your contract in detail. And that's the first thing we're telling all clients is, you are going to make some sort of claim or assertion under your document or your contract. You need to make sure that you're following the notice provisions, just like Joe said. Be very careful in how you're going about that initially.
The other thing that we're telling our clients is to look at what do you want and what are you looking for right now? And what is the ultimate goal here? Because the force majeure provision might not be the clause or the provision of the contract to be looking at. As we said, a lot of times, it does not excuse the payment of money. So if you need a break on payment of money, whether it's to your lender or to your landlord, whoever it is, you might need to look into a different kind of route to go through on that. And so I think that's the second, as everyone's immediately looking to this force majeure provisions, but it might not be the right route, and you might not even have an avenue directly under your document. And instead, it might just be an open communication with your the other side of the contract.
Morgan: We can all hope that both sides of the party could come to the table and review the contract and determine what their goals are and where they're trying to get. But we're not naïve, and I think this likely we lead to some disputes down the road. Lida, what are your observations on that in terms of the activity that we’ll see on the litigation front?
Lida: Yeah, I absolutely agree with you. I think that it is going to result in some litigation, just like we saw after and around 2007-2008. During that time with real estate. I think we have never had a public health crisis to this magnitude, this national scale. And so it is a lot of these clauses and force majeure provisions don't really address this. So we're looking at, you know, those kind of catch all phrases within the contracts and within these clauses that aren't very specific. And so it's going to become, if it does go to litigation, it's then going to become a very fact-specific analysis being looked at by the courts, and it's going to be very interesting to see how it all plays out. But I definitely think we will see these disputes. Some of these disputes, especially in the very large leases and contracts. And they're on the real estate side turning to litigation in the future.
Joe: The last thing I would say on that is litigation is a last resort. Even though I'm a litigator, I tell clients all the time litigating is this sort of the nuclear option. If you can avoid litigation, for almost all situations, the better business decision is gonna be, figure out a solution and not go that route. But if it ever does get to litigation and this force majeure issue gets examined and gets looked at, the linchpin issue and the decision that the court or the arbitrator is gonna have to make is did these circumstances truly impact your ability to perform your obligations under the contract. And that goes for whether you're a contractor in a construction agreement or it goes for a tenant in Lida’s world, if you've got rent obligations. And so that's really the first sort of question in the analysis when we're looking at this for a client is, okay, you've asked us, does the force majeure prevision protect you and cover you. And assuming that the provision covers pandemics or situations that we've got right now, you still have to prove that your ability to perform was truly impacted or made more difficult or more expensive, so that's sort of overarching all of these issues and questions, and what we tell our clients is truly think about how is the current situation? How does this coronavirus impact your ability to perform your contract no matter which side you're on?
Morgan: Absolutely. Well, anything else that you all wanted to cover today, maybe that we've missed?
Joe: History tells us that in these sort of situations, not necessarily a pandemic, because we haven't gone through many of these, but the 2007 mortgage crisis, that those sorts of points in history, at least in the U. S., on the backside of that, you see increased litigation. You see increased disputes. I don't know really why that is. I think money is more scarce. It's more of a zero-sum game, but I do think there will be an uptick in disputes because of this.
Ironically, to hit on a point that I mentioned just a second ago, I tell folks that in these situations, when you've got these disputes that are popping up, you've got these issues that are currently kind of ongoing with the COVID-19 stuff to be reasonable and try to find a middle ground. Try to find a compromise, because litigation by its nature, is unpredictable. I think these sorts of disputes and these cases are gonna be even more unpredictable.
We've never seen anything like this. The contracts, even the ones that are seemingly really solid and cover every detail and have the force majeure clause in there, if it has the litany of examples of what constitutes force majeure and it uses the word epidemic. Well, does a pandemic count? And so I think there's just gonna be a lot of questions that you can't go open up the case law books and find a case like it in the past. And I also think that judges and arbitrators and the folks that are deciding these cases, they're all going through this, too. And I think when you go into a courtroom or in an arbitration proceeding and you're coming in there and maybe run the risk of trying to beat someone over the head with these issues, and, hey, I'm owed more money or hey, you know, I don't want to give this person an extension of time. It's hard for me to believe that that judges and arbitrators are not gonna be sympathetic to folks who are kind of on the other end of that.
So I do think there will be increased disputes. I do think there will be a lot of litigation coming from this. But even more so than normal, I think clients should really try to find some way to avoid that and find a middle ground solution, because the time and expense it is, it's always going to be expensive and time-consuming. But the unpredictability and these judges and arbitrators, I think they're going to try to find a way to, you know, split the baby is the term that we call it in litigation, to find ways that people don't have to have it any harder than they already do in these crazy circumstances.
Morgan: Well, this has been really informative for me and I think our listeners as well, and I appreciate you guys joining me on the show today.
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