Coronavirus and CRE: Making use of the force majeure clause

I received a call from a good client a couple of weeks ago. He had rented a large, five-bedroom property in Whistler, B.C. for an important family reunion and had booked airlines tickets for more than a dozen people for the get together.

The owner of the rental property was from Hong Kong and planned to be in Hong Kong while the Whistler property was rented. But then came COVID-19, the infectious disease caused by the coronavirus, and the property owner refused to go forward with the rental. He said he was too fearful to return to Hong Kong and, therefore, was canceling the rental agreement. What made the issue worse was that there were no comparable properties available for rent in Whistler and, so, the reunion looked to be in real jeopardy.

Of course, the first thing we did when we were contacted was to check the rental agreement to see if the owner had the right to cancel the contract—either because of a force majeure clause or some other provision. He didn’t. We then checked Canadian law to see if our client could seek injunctive relief forcing the owner to rent the property to him. The answer was yes, given that this was a contract involving real estate and how the common law views interests in real estate as being unique. Finally, we knew that our client’s claim would have to be litigated in the Canadian courts, where the English rule (not the American rule) would apply when it came time to address who should bear the cost of the litigation. And since our client would likely be the prevailing party, under the English rule, he would likely recover his attorneys’ fees should the matter proceed to court.

After one or two letters back and forth between the parties in which we laid out our client’s position, the owner capitulated and agreed to make our client whole. And while there were no comparable properties in Whistler, the owner was able to rent a property for our client at the nearby Four Seasons resort. And so, the family reunion was saved.

Thankfully, my client was not facing a dire calamity as a result of the spread of this awful disease and we were able to achieve a quick resolution to the matter. But, as I worked my way through this quirky problem, I began to realize that as the coronavirus continues to spread, it will wreak havoc on the real estate industry in the United States. Real estate contracts are usually not drafted to address sudden and unforeseen environmental conditions considered to be “acts of God.” Usually, these types of provisions—known as “force majeure” clauses—appear only in supplier contracts, and they essentially free both parties for the duration of the force majeure from liability or obligation when an extraordinary event or circumstance beyond the control of the parties prevents one or both parties from fulfilling their contractual obligations. The common law, however, makes it clear that courts will not automatically apply force majeure principles to contracts. And even if such a clause is included in the parties’ contract, what constitutes “force majeure” must be specified. Frequently contracts will limit the definition to things such as hurricanes, floods, tornadoes, volcanic eruptions, mudslides and wildfires and may not include diseases or the fallout from pandemics like the coronavirus.

In fact, as I reviewed other lease agreements and real estate contracts, I quickly realized that none of these contracts had a force majeure clause. And without a force majeure clause, and a determination of what that meant, a supervening event which prevents performance of the contract will not (and cannot) be deemed force majeure, so as to provide relief from performance.

Indeed, as I write this article, it is becoming apparent that the coronavirus is beginning to have a drastic effect on the real estate industry as a whole. Daily, we hear the announcements from universities and colleges that they will be closing their schools and that students will be required to return home to complete their courses online. Similarly, downtown office buildings are beginning to empty out as employers implement work from home policies. And from there, the domino effect begins. What is to happen to the subway franchisee whose leased premises are now in an empty downtown office building? What recourse, if any, does that tenant have under his or her lease?

These are all issues that need to be looked at immediately by all sides to a real estate transaction. Interestingly, some industries and associations are already ahead of the curve on this issue. The NBA, for example, recently suspended the remainder of the 2019/20 season. In its collective bargaining agreement, it has a force majeure provision limiting players’ compensation should games be cancelled as a result of an epidemic. Others are not so prepared. Thus, it is critical for all parties to a real estate agreement to reach out to their professional advisors now to analyze their situations so as to put themselves in the best possible position they can be.

About the author

Andrew Fleming is a partner at Novack and Macey LLP, a Chicago business litigation boutique. He has over 20 years of experience representing clients in disputes involving a wide array of subject matters within the real estate industry. As co-chair of the firm’s Real Estate Litigation practice group, Andrew represents entities involved in virtually all aspects of commercial real estate.