Volume 44, Number 4
April 1, 2020
By Debra J. Guzov, Esq., CRE
Photo: BCFC, Corona Borealis Studio/Shutterstock.com
The medical and economic consequences of the 2020 Coronavirus pandemic are making themselves felt with nearly incomprehensible speed and force. Developments change by the day, if not the hour, making it challenging to act prudently both in the moment and over any conceivable time horizon. This article will present a brief overview of legal issues facing the real estate industry, with an emphasis on the doctrine of force majeure as a basis for canceling or avoiding contractual obligations.
The legal provision at the top of many people’s minds in the early stage of the COVID-19 pandemic is force majeure, a clause included in many contracts that excuses the fulfillment of its obligations by one of the parties in case of “acts of God” or government actions. A review of leases, vendor agreements, and other critical contracts to ascertain (i) whether they contain a force majeure clause, and (ii) if so, the exact language employed, should be high on your to-do list. Force majeure clauses provide a defense to an action for nonperformance of a contract where the cause for such nonperformance is beyond the defendant’s control.1 Such clauses are narrowly construed, and generally the force majeure clause must specifically list the event which is alleged to excuse nonperformance.2
Additionally, the party seeking to invoke the force majeure clause must be able to demonstrate that it had no ability to avoid or mitigate the effect of the triggering event.3 Mere impracticality or unprofitability is insufficient; the event alleged to trigger force majeure must prevent performance completely.4 In our experience, force majeure clauses vary widely in their coverage and practical effect: some clauses provide a defense to non-performance, while others permit outright cancellation, and still others require the parties to confer in good faith to find a solution before permitting cancellation.
Although every situation is different, we can make some general predictions about how the law of force majeure will be applied to this crisis. The widespread shutdowns ordered by governments around the world should trigger most force majeure clauses, as language encompassing governmental acts and orders is commonly included in force majeure language. However, unless your contractual language specifically includes “pandemic” or “epidemic,” there is less precedent for the proposition that pandemics ought to be considered “acts of God” or within the scope of similar “catch-all” provisions. In fact, if your force majeure clause includes a list of specific triggers—and many do—such catch-all language is likely to be construed as encompassing triggering events similar to the events which are explicitly listed, and therefore exclude the coronavirus pandemic.5 Litigants who can demonstrate that they took all the steps available to them to avert the effect of the pandemic will be more likely to succeed in invoking force majeure. On the other hand, parties who try to avoid their obligations by citing the overall downturn in the economy, rather than more specific effects of the pandemic, are likely to fail in invoking force majeure absent extraordinary circumstances. As the situation unfolds and force majeure clauses are invoked in the context of the coronavirus, we will have a body of legal authority upon which to rely; however, we still may not have a bright line test. For owners of buildings or spaces that have weathered a recent wave of event cancellations, this will be an important aspect of the law to follow.
It remains very important to remember that force majeure clauses, though included in many contracts, often vary significantly in their precise language and coverage. Moreover, different jurisdictions interpret these clauses differently, so it is critical that you receive informed and knowledgeable counsel before making a decision.
Other Legal Issues Facing the Real Estate Industry
Besides force majeure, real estate industry actors should be thinking about the following legal issues, among many others. Methods of providing notice should be evaluated so that contractual notice provisions take the reality of “social distancing” and remote workplaces into account. Often, notice provisions require the use of mail or couriers, which can be affected by government regulation and travel restrictions. For this reason, notice provisions should be revised to permit notice via email.
Similarly, transactions in real estate will take longer or be made impossible as travel becomes more difficult. Governments around the world are closing borders and implementing strict quarantines for entrants into their borders, so the pace of both domestic and international business is likely to slow down. Although the rapid ramp-up of digital communications as a substitute for face-to-face interactions will somewhat alleviate this issue, technology is playing catch-up to the situation. As of last week, services permitting virtual closings began to emerge, but there will certainly be slowdowns and backlogs with respect to documents that must be recorded in a clerk’s office, such as deeds.6 Contracts now regularly provide that an exchange of digital signatures will be sufficient evidence of execution, and your standard forms ought to include this language
as a matter of course.
Beyond the possible loss in rental income as tenants lose their jobs, landlords and other building managers may find themselves liable if their building suffers an outbreak of coronavirus—or at least the plaintiffs’ bar will attempt to create such liability! The intersection of the duty to protect the occupants of one’s building with the legal requirement to preserve medical privacy is a thorny one. As has been widely reported, one of the ways Singapore has kept its coronavirus outbreak under control so far has been through publishing almost all information about infected individuals through official channels—going right up to the line of publicly naming individuals. Of course, in the United States this is currently prohibited by HIPAA and other laws, but this is another issue that building owners and managers must monitor closely. If a resident or employee alerts you that he or she has tested positive for the virus, you should immediately notify everyone who lives or works in the building that a case has been confirmed—but without disclosing details about the infected individual. Failure to do so could risk liability for negligence in subsequent litigation.
Federal, state and local authorities are currently, and understandably, focused on pandemic response at this time, so that regularly scheduled filings or inspections might be postponed to free personnel for crisis response.7 For example, in New York, Governor Cuomo has, by executive order, suspended evictions of commercial or residential tenants for ninety days, and has also suspended the statute of limitations for commencing civil litigation through April 19, 2020.8 Pay attention to your filing deadlines, and be sure to keep an eye out for when the suspensions or postponements applicable to you expire.
Some Practical Suggestions
- If you are able to make modifications to or renegotiate contracts due to imminent expiration or renewal of a particular contract, try to include a force majeure clause if your agreement lacks one, or ensure that any existing clause includes language that accounts for quarantines or other delays as a result of the virus (this may not mitigate the effect of the current pandemic, but will greatly assist you in preparing for the next one).
- Keep detailed records which show the scope of any interruption to your business as well as costs you have incurred or anticipate.
- Know and follow applicable best practices for slowing or stopping the spread of the virus, and document that you have done so. We cannot emphasize the latter step strongly enough, and it tends to be one of the first things businesses in a crisis stop doing, but it will provide your attorneys with priceless evidence with which to defend you if needed.
In closing, we would like to offer two broader observations, one about the legal system, and one about the real estate industry. Although the law is often idealized as a hermetically sealed sphere of statute, precedent, and logic, the reality is that court systems and judges will be under the same acute public pressure we are all facing to minimize face-to-face contact. Further, while companies often turn to the judicial system for assistance in times of crisis, the courts are also working virtually and, in some instances, they are not accepting new filings for non-emergency matters (with the definition of “emergency” being tightly and narrowly construed). As a result, looking for ways to head off disputes through negotiation may become a necessity. As we noted at the beginning of this article, business owners should identify potential disputes early and be proactive to avoid litigation.
As for real estate, millions of office workers undergoing a real-time experiment of operating without a central office space—the legal and real estate ramifications of this shift alone are vast. Should remote working environments remain in place once the world returns to normalcy, this could impact commercial real estate. However, it may open an opportunity to repurpose commercial spaces into residential spaces, thereby addressing current housing shortages. We are also now learning that the United States is woefully lacking in hospitals to accommodate mass pandemics, so that we may also see commercial office buildings repurposed as hospitals and health care facilities. Further, as densely populated areas are hit hardest by the pandemic, the potential and demand for commercial spaces in less populated areas will likely increase. Therefore, planning ahead should include an evaluation of opportunities in new locales. Certainly, such evaluations will create new work for analysts and appraisers, among others.
Much of what we have tried to outline in this article will be subject to change. A single article is also far from exhaustive in covering all potential legal issues that may face the real estate industry—there are others not covered here and unforeseen issues will also surely come up. In all events, using this time to plan ahead and possibly re-chart your course will lead to new opportunities in real estate. •
This article is for informational use only, and nothing set forth herein is intended to constitute legal advice, or to create an attorney-client relationship with Guzov, LLC. You should discuss the particulars of your situation with your own attorney.
1. Kel Kim Corp. v. Central Markets, Inc. 70 N.Y.2d 900 (1987). ↩
2. Id. at 902-903. ↩
3. Goldstein v. Orensanz Events LLC, 146 A.D.3d 492 (1st Dep’t 2017). ↩
4. E.g., Aukema v. Chesapeake Appalachia, LLC, 904 F.Supp.2d 199 (N.D.N.Y. 2012). ↩
5. See Kel-Kim, supra. ↩
6. Brick Underground: Will Virtual Closings and Co-op Board Interviews Become NYC’s New Norm? https://www.brickunderground.com/buy/will-nyc-buyers-shift-to-virtual-closings-during-the-pandemic-escrow ↩
7. NYC Department of Buildings, Notice on COVID-19 Enforcement Response https://www1.nyc.gov/assets/buildings/pdf/covid19_enforcement_response_sn.pdf ↩
8. Executive Order No. 202.8 dated March 20, 2020. ↩