By 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 unforeseen 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, and can it affect 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 unforeseen 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 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 holistic approaches to the meaning of resilience. They range from careful planning that anticipates extreme events will occur and implements appropriate zoning and building codes for resistance to those hazards, to adding to that basic meaning that takes human social interaction, productivity and health elements into consideration. These considerations have been around for some years, even though they are not in the forefront of every practitioner’s mind. Organizations such as the U.S. Green Building Council and Green Business Certification Inc. (respectively, “USGBC” and “GBCI”) are behind a rating system, RELi 2.0, which “will help identify and reduce the risk of damage in the event of a natural disaster, economic disruption, resource depletion or other crisis for buildings, homes, neighborhoods and infrastructure.” 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).”  

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 resilient property will anticipate and withstand unexpected forces and events, and as a public policy matter, also satisfy the social and economic needs of its occupants. Until this becomes a reality rather than an aspiration, counsel and other advisors 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:

1. 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 catastrophic 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 determining the parties’ obligations, and the casualty provisions will not often adequately cover the details. 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 catastrophic 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.

2. 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 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, common and case law that will guide you on what should be included based on how foreseeable the event is considered for the area. More often than not, there are more favorable 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.

First « 1 2 » Next