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April 5, 2020
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California’s COVID-19 “Stay at Home Order” to Test Force Majeure Provisions in Many CRE Contracts

3/25/20

This column was written by the law firm of Jackson Tidus, out of Irvine.

As most of you are already aware, on Thursday, March 19, 2020, Governor Gavin Newsom issued Executive Order N-33-20, a "Stay at Home Order" intended to preserve and protect the health and well-being of all Californians (and to establish consistency of comparable local "stay at home" orders propagating among various cities and counties across the State) in order to slow the spread of Coronavirus Disease 2019 (COVID-19). Under that order, all individuals living in the State of California were directed to stay home or at their place of residence, except as needed to maintain continuity of operation of the federal critical infrastructure sectors, critical government services, schools, childcare, and construction (including housing construction).

Due to the order, it can be expected that a large number of businesses and individuals will be prevented from engaging in typical commercial and industrial activities, including activities that may be necessary for performance of a covenant (or the exercise of a right) prescribed by contract; at least within the time period that such performance was scheduled to occur. As a result of prohibitions against non-essential activities under the Stay at Home Order, and the corresponding inability (or restricted ability) to operate, parties may find themselves in technical non-compliance with their express contractual duties and obligations. While there are several common law doctrines that could potentially apply for purposes of excusing non-performance during the term of the Stay at Home Order (e.g., impossibility of performance, frustration of purposes, superseding illegality), a common protection in many contracts should first be considered and utilized (if applicable) to extend time deadlines and avoid unnecessary litigation.

Force Majeure Provisions - Exercise Often Requires Timely Notification

Notably, contracts frequently contain a "force majeure" clause (a French phase meaning "superior force") that excuses nonperformance or late performance where actions necessary to fully perform are prevented by proverbial "acts of God" or more mundane outside forces that are yet unforeseeable, beyond the reasonable control of the parties and insurmountable. While the title of the applicable contract provisions may differ - with titles such as "Force Majeure," "Acts of God," or "Unavoidable Delay" - they each serve the same objective of excusing nonperformance or late performance to the extent the ability to perform is prevented or delayed by an external, unforeseen and uncontrollable force or event.

While force majeure provisions are common, the specifics of force majeure provisions vary widely. Some have narrowly defined concepts of external forces (e.g., earthquakes, unusual weather phenomenon, war), while others are more broadly defined (e.g., strikes and labor disturbances, temporary commercial unavailability of materials, temporary disruption of normally functioning financial markets, or other events or circumstances beyond a party's reasonable control). Notably, a party's ability to avail itself of the benefits and protections of a force majeure clause may depend on notification being delivered to the counterparty within a short period of time following the commencement of the circumstances giving rise to the excuse/delay of performance; and the failure to timely notify counterparties of a force majeure event can reduce or even eliminate those benefits and protections. So, even though it may be unclear at this point whether, to what extent and for what period the fallout from the COVID-19 pandemic will affect contractual deadlines, it may be prudent (whether because it is legally necessary, evidences good faith, manages expectations or permits mitigation of loss) to provide notice now.

Separately, some contracts may limit the number of days that a deadline may be extended due to a force majeure event. Whether a limitation is imposed on a per event basis or in the aggregate, a party may lose the right to claim a force majeure delay if it extends beyond a certain time period - even though the circumstances or events causing the delay are beyond a party's control. It is important to understand these limitations, evaluate whether they could make the force majeure clause of limited benefit or even futile (especially in uncertain times), and if so, start negotiations with the counterparty early to try to prevent a default under the contract.

Accordingly, we encourage you to expeditiously review all of your executory contracts (including loan documents, joint venture agreements, leases or other occupancy agreements, construction contracts, and other agreements) that have time sensitive performance requirements, and to determine whether (a) a force majeure clause is implicated by the recent events of COVID-19 and the Stay at Home Order (or earlier directives issued by local governments), (b) delivery of notice is required to excuse untimeliness of performance or to otherwise preserve your rights, or (c) relief from limitations or special considerations contained within such force majeure clause will need to be negotiated or otherwise obtained.

Steven Dettmann is a real estate transactional, community development, and commercial/industrial subdivision attorney with broad experience in complex real property transactions, including acquisitions, dispositions, joint ventures, financing, development, construction and leasing.

Sonia Lister focuses on real estate financing, acquisition, disposition, joint ventures, development, construction and leasing. Whether it be new transactions, modifications, out-of-court workouts, or restructurings, Ms. Lister has over 28 years of experience helping clients negotiate, document and close a broad spectrum of real estate transactions. In addition, Ms. Lister's longstanding commitment to community and volunteer services has been an important part of her growth and development as a lawyer.




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