What COVID Taught Real Estate Attys About Force Majeure

By Andrew McIntyre
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Law360 (March 9, 2021, 6:02 PM EST) -- When COVID-19 began rapidly spreading across the U.S., real estate lawyers scrambled to help clients figure out whether force majeure clauses could excuse them from certain obligations, and a year later, much has been learned about their efficacy.

While lawyers say the devil is in the details in terms of how such provisions are worded, the past year has taught parties that they tend to be more useful in certain contexts like construction and less useful in disputes over payment of rent for commercial leases.

The common contract clause allows parties to get out of certain obligations in the wake of extreme events, often defined as "acts of God."

"There's no question that everyone is paying more attention to force majeure provisions now than I've ever seen in my career," said David Tabibian, a partner at Jeffer Mangels Butler & Mitchell LLP. "We're seeing it treated differently in different types of real estate contracts."

Questions still remain, however, on how force majeure disputes will play out in the hospitality sector, since those cases have moved more slowly than cases in other sectors.

Here, Law360 looks at three things we've learned about force majeure one year into the pandemic:

It Has Legs in the Construction Context

Developers are perennially juggling a series of deadlines they have to meet per agreements with lenders or capital partners, and over the past year, the pandemic has caused widespread delays on the construction front. And experts say developers have had some success using force majeure in those contexts.

Parties have studied their agreements in great detail, and in many cases, developers are finding that the wording of force majeure in contracts has allowed for relief due to the pandemic or related government shutdowns.

"Construction agreements and contingency management agreements tend to have more teeth," Tabibian said, speaking of force majeure provisions in those agreements in contrast to landlord-tenant agreements.

In the construction context, force majeure can give developers more time without penalty if they miss certain milestones.

Tabibian said problems like delays in getting permits issued due to lockdowns can trigger such provisions and provide certain parties relief.

"They are more broadly drafted and have more teeth in them," Tabibian said. "They allow a developer to delay his obligations or provide some time. ... On the developer side, we've seen much more developer-friendly, broader force majeure provisions."

And given what's been learned over the past year, developers have sought to enshrine even stronger force majeure protections in their agreements, and many have been successful.

"On joint ventures for development deals, it's definitely … been the same concept of expanding the definition," said Elsa Ben Shimon, a partner at Stroock & Stroock & Lavan LLP. "Capital partners are not necessarily receptive to that."

Difficult To Use for Payment of Rent

While close readings of construction contracts a year ago revealed ample language that was friendly for developers, experts say tenants who are struggling to make rent have not had the same success with force majeure.

Just as in construction agreements, the devils are in the details, and experts say the vast majority of leases have clauses that carve out payment of rent as an exception to the force majeure language of the contract.

"One of the things that we've seen over the course of the last year is that it is particularly important to those looking for relief on the rent side to consider the specific language used. How specific is it?" said Bonnie Neuman, head of the real estate finance practice at Cadwalader Wickersham & Taft LLP. "There are some that cover pandemics and some that don't. Some have gray areas."

Such carveouts did not stop tenants from sending a barrage of letters to landlords last spring, citing force majeure as a reason for not paying rent. Yet landlords and courts by and large have not granted relief on those grounds. Some have offered some concessions and abatement to tenants, experts note, but not on force-majeure grounds.

"It's been heavily looked at in leases for commercial tenants and whether they are paying rent," Neuman said. "We haven't seen a lot of relief."

Hospitality Remains a Question Mark

Hospitality disputes have been slower to make their way through the courts, and experts say the jury is still out on how exactly they will interpret force majeure language in this context.

Mark Adams, a partner at Jeffer Mangels, said hospitality disputes at present are coming in two main flavors: disputes between owners and lenders, and disagreements between owners and brands. Brands are entitled to management fees, experts say, and owners have in many cases not been able to pay those fees given the drastic drop in occupancy in 2020.

Additionally, hospitality cases have moved more slowly than landlord-tenant disputes since the latter cases, which are unlawful detainer disputes, tend to result in expedited trials.

That means the language of force majeure agreements in hospitality contracts has not been tested at the same level as in other contexts.

"Most of [the force majeure agreements], even after SARS, didn't include language that would cover a pandemic. Parties have tried to get creative in looking at things," Adams said. "I think force majeure agreements that came in after SARS that didn't include pandemic … language, I think that they're going to have a really tough go. The agreements that did include mention of pandemics, those are going to be solid."

And as courts are now reopening, those cases are starting to make their way through the system, and judges will look closely at the precise wording of the agreements.

"When we look back at 2020, all I see are questions," Adams said, speaking about force majeure in the hospitality context. "When I look forward to 2021, I see answers."

--Editing by Philip Shea.

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