Real Estate Contracts: Does COVID-19 Excuse Timely Performance?
In the wake of the continued spread of COVID-19 across the United States, and its ramifications of unprecedented restrictions on travel, deteriorating financial markets and ceasing of business operations, Tannenbaum Helpern’s Real Estate practice has been diligently monitoring the impact on the real estate industry and advising our clients on critical legal issues raised by the pandemic, including issues relating to purchase and sale agreements, loan agreements, operating agreements and commercial leases. In particular, one of the most common questions that arises is whether an obligation to perform by a certain date under an agreement will now be excused so long as current circumstances continue.
Although this question needs to be analyzed on a case-by-case basis and is fact specific, the following questions and answers regularly enter the discussion:
Is the obligation subject to contractually agreed-upon “force majeure”?
A “force majeure” clause is a provision in an agreement that, in general, excuses performance so long as unusual or unanticipated events, out of the control of the party obligated to perform, exist and continue. Examples of common events excusing performance include acts of war, natural disasters, acts of God, governmental shut downs, and labor and material shortages. Very often, the clause includes a catch-all to cover delays due to any events outside the reasonable control of the performing party.
Accordingly, whether COVID-19 specifically triggers the application of force majeure depends on the specific language of the force majeure provision. Under certain agreements, the existence of the global pandemic, in and of itself, could trigger the application of force majeure; but if that is not the case, force majeure may be triggered by governmental imposed shut-downs, a governmental declaration of a state of emergency, the inability to obtain labor or materials, or by the general “catch-all”.
What are the conditions and limitations to the application of “force majeure”?
Again, the details in the force majeure clause are critical. As a condition to exercising the right to delay performance due to force majeure, many force majeure clauses have strict requirements to provide notice of the force majeure event within a specified time-period of its occurrence. In addition, many force majeure clauses limit the period of excused performance, irrespective of the continuation of the force majeure event.
It should be noted that, under most force majeure clauses, the obligation to pay money is typically (and expressly) not excused by reason of a force majeure event.
Where an obligation is not subject to a force majeure clause, will a Court nevertheless excuse delayed performance so long as business remains interrupted by the unprecedented scope of the COVID-19 pandemic?
Under New York and Federal law, as well as most other states, Courts generally enforce commercial agreements “as written”. Accordingly, a Court will not read-in a right of delayed performance due to force majeure events.
However, relief may be available through the common law doctrines of impossibility and impracticability. The doctrine of impracticability may provide relief where superseding events occur, the nonoccurrence of which was a basic assumption on which the contract was made and it would be unreasonable or commercially senseless to require performance in light of such events. The doctrine of impossibility of performance may also excuse temporary non-performance in exceptional circumstances. To establish impossibility of performance, a party must show that performance was rendered objectively impossible for any similarly situated party.
These doctrines may have particular relevance during times when governmental measures render performance temporarily impossible. See Bush v. Protravel International, Inc., 192 Misc.2d 743 (2002) (“precedent is plentiful that contract performance is excused when unforeseeable government action makes performance objectively impossible.”).
In Bush, the Court examined whether a party could be excused for failing to cancel a travel contract in accordance with its terms where, immediately following the September 11, 2011 attacks, “New York City was in the state of virtual lockdown with travel either forbidden altogether or severely restricted” and “was on a wartime footing, dealing with wartime conditions.” Id. at 746. The Court held that measures implemented by State and City governments (including their declaration of a State of Emergency in the wake of 9/11) strongly supported the claim that performance of the contract had been rendered impossible for a period of time. Id.
Courts are typically strict in applying the doctrines of impracticability and impossibility to excuse timely performance. Negative economic or market conditions, or financial inability, no matter how severe, will not (without other facts) be sufficient to support a case of impracticability and impossibility of performance. However, using the Bush case as guidance, it appears that Courts may exercise greater leniency when enforcing contract obligations that were rendered temporarily impossible or impractical as the result of COVID-19.
It should be noted that these doctrines vary from state to state and are characteristically fact sensitive. Be aware that many states impose a duty to mitigate damages on the party seeking to delay performance to the extent reasonably possible.
Will new Federal or State legislation provide relief from timely compliance with contract obligations due to the unprecedented scope of the COVID-19 pandemic?
As of the date of this article, no such legislation has been raised, as the government remains focused on the health and welfare of its citizens. It should be noted that no such legislation was passed in the wake of 9/11. With respect to contract issues, it is possible that the legislative bodies will choose to rely on the Courts’ judgements in determining whether relief from contract performance is warranted, on a case-by-case basis.
In the event that a failure of timely performance is anticipated under any real estate agreement, it is important to document the timing and effects of any business interference and to review the applicable agreement’s provisions promptly, as time may be of the essence. With respect to real estate agreements entered into in the future, we anticipate those agreements will take into account our experiences with COVID-19, including an expansion of force majeure clauses to cover pandemics and quarantines, much in the way that the tragic event of 9/11 introduced the concept of requiring terrorism insurance.
Tannenbaum Helpern is actively monitoring the fluid COVID-19 situation, including any proposed legislation and we will keep you posted on developments.
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03.19.2020 | PUBLICATION: Note From The Real Estate Group | TOPICS: Real Estate | INDUSTRIES: Real Estate