What is Force Majeure?
You may have heard the phrase “force majeure” being thrown around quite a bit these days in response to the disruption caused by the Coronavirus. You may also have wondered what this phrase means for you and your real estate contracts. Well, if you own commercial real estate, this is well worth reading.
The term ‘force majeure’ is defined as ‘an event or effect that cannot be controlled.’ In short, a force majeure clause operates to excuse or extend time on performance obligations listed in an agreement, when an unforeseeable/uncontrolled event prevents a party from meeting their contractual commitments.
Nearly all commercial contracts, including most commercial leases, contain some form of force majeure clause pertaining to prevention, delays or stoppages due to:
- Acts of God (floods, earthquakes, hurricanes, fires, etc.)
- Acts of war
- Acts of terrorism
- Acts of government authorities
- Strikes or labor disputes
- An inability to secure materials
- Other causes beyond the reasonable control of a party
Here’s an example: A landlord failed to deliver timely possession of the leased premises due to construction delays. The delays were caused by a temporary restraining order that prohibited construction on the premises for 40 days. The court found that the temporary restraining order was a “government prohibition” and because it was specified in the force majeure clause, the landlord’s time to deliver possession of the premises was extended by the 40 days that the order was in effect.
IMPORTANCE OF A FORCE MAJEURE FOR BUSINESSES
In the event of a force majeure, commercial tenants are typically still on the hook to pay rent. But, many commercial owners make an effort to include specific language in their contract stating that a force majeure may not be raised as a defense for tenants who refuse to pay rent because they claim they are prohibited from entering or continuing their business operations on the leased premises. The wording of a contract is key.
TIPS ON WHAT TO LOOK FOR IN A FORCE MAJEURE
Here are some important questions to ask yourself when reading/applying a Force Majeure clause:
- Does it specifically identify obligations?
- Does it mention what constitutes as a force majeure event?
- Does it reference a degree of impact on a party’s performance due to the event?
- Does it mention an extension of time or is it complete relief from obligations?
It may seem like a waste of time and money to negotiate a contract clause covering such unlikely events. But given the uncharted waters we find ourselves in today, it’s better to be safe than sorry. So, when disaster strikes, parties which have included a customized force majeure clause can take comfort in knowing that they have a built-in contract protection that addresses their needs.
A recent office memorandum issued by the Ministry of Finance (O.M. No. 18/4/2020-PPD) clarified that the disruption of the supply chains due to the spread of coronavirus in China or any other country should be considered as a case of natural calamity and “force majeure clause” may be invoked, wherever considered appropriate. So even though a force majeure clause may not apply to the existence of the Coronavirus, it is warranted as a result of government actions, which is recognized as a force majeure event.
Remember Force Majeure is a contractual concept, not common law. The bottom line is, don’t go asserting force majeure without having contract language in hand and always consult with an attorney well versed in lease/contract law.
Adam Dickert is a Partner at Progress Realty Partners. He began his career with Marcus & Millichap as a commercial broker, establishing relationships with some of the most successful real estate owners, operators and investment funds. He spearheads the acquisition and deal valuation activities while overseeing the transaction process from first glance to closing. Adam utilizes his finance background to get a full grasp on the economics of each asset and implements ultra-conservative underwriting practices to ensure minimum risk, as well as steadily increasing returns for partners.