A force to consider in real estate transactions

Before March 2020, force majeure provisions in real estate contracts were seldom implemented, and sometimes received minimal attention in real estate contract negotiations. Such provisions are meant to cover contracting parties against unforeseeable events that are outside the control of those parties.

Now, however, the real estate industry is contending with two situations that could be considered typical force majeure events: the COVID-19 pandemic and Russia’s war with Ukraine. Despite the significant disruptions these events are causing to the industry, it is not a given that either would qualify as a force majeure event under a specific contract — that depends on the language of the provision at hand. Parties to real estate contracts should fully consider force majeure provisions and strive to draft clear language that appropriately defines the events that constitute force majeure and whether and how the parties’ performance is excused or extended.

Generally, for an event to be considered force majeure it must be outside of the control of the parties, causing one or both of the parties to be unable to perform its obligations under the contract, in which case the provision operates to excuse the party that is unable to perform from its obligations under the contract (depending on the exact wording of the provision).

Similarly, a force majeure event may simply make performance too difficult or delay performance, with the force majeure provision allowing the party to extend the time for its performance. In short, the force majeure provision is a contractual manifestation of the defenses of impossibility, impracticability, and frustration of purpose — defenses that provide a contracting party a defense to breach of contract actions if the contract is impossible or impracticable to perform, or if the purpose of the contract has been frustrated.

Force majeure provisions may be implicated in real estate contracts in several ways, but the two primary implications are commercial leases and contracts for real estate development.

Many commercial lease agreements contain a force majeure provision. Such provisions may protect the party that has a build-out obligation, so that if any of the work is delayed by force majeure, the responsible party has a way of extending the time for performance. The provision may also be used to excuse the tenant’s inability to continuously operate or remain open for business or to open by a certain date. Many commercial lease agreements will expressly carve out the payment of rent or other monetary obligations from the force majeure provision so that a party, usually the tenant, is never relieved of any monetary obligations, regardless of a force majeure event.

Force majeure can also come into play in real estate development if, for example, the ability to acquire labor or materials is hindered or delayed, which in turn may hinder or delay construction of improvements, such as industrial complexes, multifamily buildings, or retail shopping centers. The force majeure provision may be used to either extend the time for performance or as a defense if one of the parties pursues a breach of contract action against the other for outright failing to perform.

The inclusion of a well-drafted force majeure provision is more vital than ever to parties to real estate contracts. When drafting such a provision, it is important to consider what types of inability to perform is excused. For example, in commercial leases, the parties should consider whether the tenant’s inability to pay rent or the landlord’s inability to pay a tenant improvement allowance is ever excused because of a force majeure event. But the parties should also consider whether delays in opening for business or remaining open should be covered by the provision. Because of the provision’s risk-allocation purpose, it is critically important to determine what contract obligations, if any, are covered.

What may be most important is considering what events qualify as force majeure. The parties can specifically identify events that qualify or do not qualify as force majeure, or the parties can more broadly define the types of events that would qualify.

Some courts have construed force majeure provisions narrowly and have been reluctant to cover events outside those expressly listed. Using COVID-19 and the Ukraine war as examples, the provision may generally apply to pandemics and/or epidemics and wars, though even those terms can be imprecise and imperfect. Considering that we are two years into the COVID-19 pandemic, the parties could either expressly include its impacts as a force majeure event or exclude them (especially because the COVID-19 pandemic is hardly an unforeseen event anymore).

This exercise can seem counterintuitive at times, as any events that the parties specifically consider and include in the force majeure provision are, by their inclusion, not unforeseen. In any event, contracting parties are usually provided wide discretion in defining the terms of their relationship, so the parties should determine what events, if any, would excuse or allow a party to delay performance.

Recent events have increased the relevance of force majeure provisions to parties entering commercial leases, real estate development transactions, and other real estate transactions. So, when negotiating a transaction, the parties should consider the force majeure provision as a bargained-for (not standard) clause and should consider setting forth in the contract what events qualify as force majeure events, what rights the parties have if a force majeure event occurs, what conditions must be satisfied to exercise such rights, and what types of performance may be delayed or excused by force majeure events. Otherwise, parties risk a court holding that an event qualifies as force majeure even if the parties did not intend for that to be the case and vice versa — events that the parties thought would qualify under a general clause may not.

Caulin Price and Steve Moore are members of Stoel Rives’s real estate group.