By Andrew McIntyre

Law360 (June 16, 2020, 4:33 PM EDT) -- Many real estate owners, lenders and tenants — as well as buyers and sellers — are finding their force majeure contract clauses to be too broad as the COVID-19 pandemic brings increased scrutiny to such clauses, StoneTurn partner and law firm expert Jeffrey Matthews told Law360 in a recent interview.

Matthews, who works in StoneTurn Group LLP's Dallas office, advises many of the largest U.S. law firms and also works with in-house legal departments. He said that during the COVID-19 pandemic, he's seen many force majeure clauses that have lacked adequate specificity on questions such as what time period the clause applies to and what steps parties are required to take to try to mitigate the event.

"You might be able to avoid disputes if the clauses are more specific, more granular in nature," Matthews said. "Attorneys think in terms of protections. We're thinking in terms of disclosure. We're trying to come at this from a financial impact perspective. It can be difficult if the language isn't there."

Force majeure clauses, common in a wide range of real estate contracts, excuse a party from performing a certain obligation under the contract in the event of an extreme or uncontrollable event, often described as an act of God. Such clauses rarely used the word "pandemic" prior to the emergence of the novel coronavirus, although many are now using it. Force majeure typically does not excuse the obligation to pay rent, although that may also be changing.

One way force majeure clauses have caused issues is with mergers and acquisitions, Matthews said.

Many parties who signed deals prior to the pandemic are experiencing difficulty closing, and the way force majeure was written into the deals is crucial, he said. Contracts with vague force majeure language are more open to interpretation, while the parties that wrote specific force majeure language into their contracts face fewer uncertainties when it comes to closing deals.

"You may have a risk of that deal not going forward," Matthews said. "You may have a buyer and a seller that have based a transaction on projections, forecasts that could have been compiled pre-the COVID era. COVID impacts projections, forecasts. The numbers may have changed."

But force majeure is also coming into play with business interruption disputes.

There, as in the M&A context, the question is how narrowly the clauses have been written.

And when it comes to business interruption, there is also the related question of what insurance coverage is provided and available to claim, Matthews said.

"On the pure business interruption side, there is a direct financial impact," Matthews said. "They may go and look to recover some of the losses from their insurance provider. We're seeing a lot of movement back and forth — discussions and disputes — between the insured and the carriers as to what's covered … and what mitigation is required. The business interruption issue requires negotiating with your carrier as to whether or not a pandemic is covered."

StoneTurn, a global advisory firm, provides compliance and regulatory risk analysis, among other services, to clients. The company has offices in the U.S., South America, Europe and Africa, and Matthews said the firm is also actively expanding across the Asia-Pacific region.

Matthews spends a good deal of time working with law firms, and said his firm is often called in when there is already a dispute, although he also advises law firms as they draft material adverse change and force majeure clauses.

He noted that while force majeure clauses clearly affect property owners and tenants, they can also have a wide-reaching impact on lenders, investors and even employees at the properties.

"The direct impact on the real estate companies can be quite a surprise," Matthews said. "Tenants are in a position where they have had to close for a period of time. [The pandemic] has prevented their business from moving forward."

He said that when drafting force majeure clauses in the future, real estate companies would do well to consider the experts who will be poring over them if disputes arise, and noted that precision of clauses for construction deals is particularly important, given the supply chain issues that have arisen amid the pandemic.

"In construction … the supply chain may have been disrupted, may have been delayed," Matthews said. "We're going to see some disputes around that."

The bottom line, Matthews said, is that specificity should rule the day when drafting force majeure clauses.

"I've seen clauses that lack specificity on coverage, the loss period, mitigation," Matthews said. "I think that we're going to see these clauses being tested. … You're going to see the courts reopen. You're going to see disputes around breach of contract where performance didn't happen."

--Editing by Kelly Duncan and Alanna Weissman.

For a reprint of this article, please contact reprints@law360.com.