By; Loretta Thompson, Esq.
By the the time anyone reads this, most of the world will be subject to various levels of social distancing and quarantines due to the Covid-19 pandemic. It is likely that few legal practitioners would have predicted the planet would be in this situation a year ago, six months ago, or a couple of months ago. Relying on my direct experience, although the same principles and provisions are relevant to all types of contractual agreements, this writing will focus on the impact of unforseen events on real estate transactions, how the concept of “resilience” applies to mitigate against such events and what you can address in the document and in other negotiations.
Consider this: What happens generally to the value of real property that has been subject to an unforeseen event outside of the control of the parties, what is commonly termed a “force majeure” (French for “superior force”) event, a force in nature that human vigilance and industry can neither foresee nor prevent,[1] and can it affects present and future owners, and transactions between parties? Many times these events have a significant, even outsized impact on the transaction, if it goes forward, and the aftermath when the transaction is consummated. How the parties address a potential unforseen or force majeure event in the contract has a direct correlation to the subject property’s resilience. A practitioner can help a client assess the risks of owning, financing, leasing and constructing on real property by understanding that you don’t have to be all-seeing or clairvoyant, but you need to address the risk of force majeure events occurring head-on as a certainty.
Legal professionals in all practice areas have have likely heard the term “resilience” over the past years, as existing and future land owners assess the relative risks of entering into a transaction for the purchase and sale of real estate, and the benefits and burdens of owning that particular property. There are literal and wholistic approaches to the meaning of resilience. They range from careful planning that anticipates extreme events will occur [2] Many will be surprised that this rating system was developed almost six years ago, and is “[b]ased on a system of points and prerequisites organized according to eight categories. These include Panoramic Approach (which covers pre-planning, discovery, and systems thinking); Hazard Preparedness; Hazard Mitigation + Adaptation; Community Cohesion/Social + Economic Vitality; Productivity, Health + Diversity; Energy, Water + On-site Food Production; Materials + Artifacts; and Applied Creativity (which recognizes innovation).”[3]
Applying a similar quasi mathematical model to the discussion here, it may look like as follows: force majeure event<=>resilience<=>stigma. The belief is that a more reslient property will anticipate and withstand unexpected forces and events, and as a public policy matter, also satify the social and economic needs of its occupants. Until this becomes a reality rather than an aspiration, counsel and other advisers will need to expressly provide for protection on the contract terms for these events.
Let’s address some of the practical realities, and see why it is important to include an express force majeure provision in your contracts:
What’s in Your Contract? While working on a variety of contracts over the past few months, several of them pre-printed forms promulgated by various trade and professional associations, it struck me that most of them did not include provisions that addressed unforeseen circumstances either adequately or at all (commonly referred to as force majeure clauses). Some included “MAC” or material adverse change provisions, and almost all of them had some casualty language, but so many of them were absolutely silent on the issue of how the parties were going to address an event so catestrophic that it would require a more detailed roadmap on how the parties were going to fulfill the terms of their duties and obligations. Don’t assume that performance will be delayed or excused in the event of a force majeure catastrophe. Many jurisdictions will look to the express language of the contract for guidance in determing the parties’ obligations, and the casualty provisions will not often adequately cover the details.[4] You will want to closely examine contract provisions concerning default, liquidated damages, choice of law and time of the essence. Also, any discussion about handing a catestrophic event dovetails with a contract’s insurance provisions, and whether we are properly advising our clients on how to cover (to the extent possible) unforeseen events in their insurance coverages. At this point, there are going to be some very hard conversations with insurers about maintaining or even procuring insurance for many of these risks, including business interruption insurance.What Makes Land Unique (Other Than The Obvious)? When studying for a real estate or broker license, or in a real property law class, we are taught that all real property is unique. It comes with a history, absorbs the results of the actions by many forces: humans, vegetation, wildlife, the overall impact of nature, and is transformed by that use. When drafting your force majeure provisions, take into consideration all of the events that might impact your transaction. Is the property impacted by known and mapped hazards such as liquefaction and flood zones? Is the property under contract abandoned, or perhaps is tied to a notorious event that occurred during the contract period such as murder or mayhem? Or, are there historic physical events such as landslides or tsunamis that occur every so many years that should be spelled out? Keep in mind that every state has enacted codes regarding the law of impossibility[5] , common and case law[6] that will guide you on what should be included based on how forseeable the event is considered for the area. More often than not, favorable there are more outcomes for those provisions that include more exhaustive examples of potential force majeure events that are relevant to the surrounding area. Be both broad and very specific as possible, given the precedence of certain events in your jurisdiction.Timing is Everything. Consider making performance contingent of the parties giving each other notice of a potential delay due to a force majeure event. Be realistic about the time frame, as well as be specific about the scope of the interference necessary to claim a force majeure delay. In other words, how affected by the event was the party who is making the claim of non-performance? You will also need to consider whether you want the provision to be tied to one or all of the performance provisions (e.g., due diligence inspections, the closing date). Also, consider what the penalty will be to claim a force majeure event. Do the parties anticipate allowing for a complete excuse from performance, or a only delay in the transaction timing? My experience is that many counsel have agreed (as supported by their jurisdiction’s law) that excusing performance is necessary if it is commercially impracticable, the purpose of the contract has been frustrated, non-compliance would be advisable under the law, impossible, or outright illegal (e.g., in the event of a moratorium). Additionally, as noted in the paragraph below, you may want to consider whether the event stigmatizes the property as grounds for excuse from compliance.When Does a Force Majeure Event Create a Stigma for the Property, and Can That Excuse Performance? Some transactions can be affected by force majeure events that could materially affect the value and proposed use of the property. Take for example, a situation where a major earthquake occured in an area that has not had an earthquake for many tens of years (often such events are referred to individually as an “Act of God”), and the property was not necessarily in an area mapped for that type of seismic activity. The subject land housed an income-producing winery and vineyard operation, several historic buildings were damaged, and a few lives lost. Initially after the event, the desirability of the property plummeted for the buyer and its lender. Having a robust and enforceable force majeure provision in the purchase contract would have been helpful in excusing performance for this buyer. As luck would have it, it turned out that the lender was anxious to make the loan given its substantial relationship with the buyer/borrower, and was satisfied that the existing earthquake coverage and business interruption insurance would cover the losses. However, you don’t want to be in the position of advising a client about the lack of options, particularly if the client perceives or believes that the property will never be restored to its former significance or be pegged the potential stigma of recent human casualties.Now That Something [Bad] Has Happened, How Bad Was it Really (i.e. Forseeable), How Do Help your Client Cope, and What Is Your Role? In a dispute about performance, most triers of fact will look to determine the foreseeability of the event. Additionally, the party bringing the action to either delay or void the contract carries the burden of proof that the event was not foreseeable.[7] It is difficult to prove impossibility to excuse full performance, rather than just a delay in performance.[8] The current Covid-19 pandemic is likely to be considered an unforeseeable event given its foreign origins and novel pathology. As I write this we are seeing contracts of all types stall in mid-transaction. It doesn’t appear due to a lack of desire to consummate the transactions contemplated by the parties, but rather is due to the sheer scope of the pandemic, and the loss or temporary stoppage of vital personnel and services to keep the transactions moving along. It is proving that logistics will be the biggest impediment to keep the wheels of commerce rolling. It is too early to gauge the ultimate impact on real estate transactions. Much will depend on the services of other people supporting the transaction, such as architects, contractors, materialmen, inspectors, service contractors and lenders. However, as counsel to our clients, we will need to advise them through a minefield of logistics to either maintain the transaction, or to guide them to the sidelines.Addressing the Unforeseen Event With Resilience. Draft force majeure provisions with precision and think about how far can that definition be stretched to include all types of events that would lead to classifying the property as stigmatized, such as highly improbable death events, pandemics arising from novel diseases or viruses, or even alien invasions of all kinds. You will want to advise your clients on hedging or mitigating certain risks with insurance and resilience measures. If your clients are already involved with Energy Star or LEED certifications, they will already be somewhat or well versed in sustainability theories on resilience, resilience programs and their application to property construction, management and operation, by their association with USGBC, UBCI and other similar organizations. In short, expect the unexpected, and chalk it up to reslient clairvoyance.
[1] London Guarantee & Accident Co. v. Industrial Accident Commission of California, 202 Cal. 239, 259 P. 1096, 54 A.L.R. 1392 (1927).
[2] Green Building Law Update, Resilience is the Future of Real Estate and USGBC Spells it RELi, By Stuart Kaplow on March 17, 2019 https://www.greenbuildinglawupdate.com/2019/03/articles/resilience/resilience-is-the-future-of-real-estate-and-usgbc-spells-it-reli/
[3] USGBC+, Unveiling RELi 2.0: Piloting A New Standard For Sustainability, Resilience, Spring 2019, Written by Katharine Logan , http://plus.usgbc.org/unveiling-reli-2-0-piloting-a-new-standard-for-sustainability-resilience/
[4] Horsemen’s Benevolent & Protective Ass’n v. Valley Racing Ass’n , 4 Cal. App. 4th 1538, 1564-65 (1992), citing Pacific Vegetable Oil Corp. v. C. S. T., Ltd. 29 Cal. 2d 228, 238 (1946).
[5] In California, Cal. Civ. Code § 1511 governs.
[6] Industrial Development & Land Co. v. Goldschmidt, 56 Cal. App. 507, 509–510, 206 P. 134 (2d Dist. 1922) .
See Lloyd v. Murphy, 25 Cal. 2d 48, 54–55, 153 P.2d 47 (1944) for a general discussion of this doctrine.
A.L.R. Library
Rights between landlord and tenant as affected by zoning regulations restricting contemplated use of premises, 37 A.L.R.3d 1018 ; Gas and oil lease force majeure provisions: construction and effect, 46 A.L.R.4th 976
[7] Oosten v. Hay Haulers Dairy Emps. & Helpers Union , 45 Cal. 2d 784, 788 (1955).
[8] Lloyd v. Murphy, 25 Cal. 2d 48, 54–55, 153 P.2d 47 (1944) ; Brown v. Oshiro, 58 Cal. App. 2d 190, 193–194, 136 P.2d 29 (2d Dist. 1943) ; Grace v. Croninger, 12 Cal. App. 2d 603, 607, 55 P.2d 940 (1st Dist. 1936) ; Davidson v. Goldstein, 58 Cal. App. 2d Supp. 909, 911, 136 P.2d 665 (App. Dep’t Super. Ct. 1943) .
