COVID-19 and Commercial Real Estate: Force Majeure Considerations
On March 9, 2020, Ohio Governor Mike DeWine declared a state of emergency in Ohio due to the effects of COVID-19, also known as coronavirus. In the days that followed, Governor DeWine has taken further measures to limit the spread of COVID-19, ordering the closure of schools, bars, restaurants, fitness centers, casinos and salons, and recommending the closure of day cares, private businesses, religious institutions and non-essential retailers. On Sunday, March 22, 2020, the Ohio Department of Health issued a mandatory Stay at Home Order that requires all businesses not providing "Essential Services" as defined in the Order to close and employees to stay home and to work remotely if possible.
Similarly, Kentucky Governor Andy Beshear declared a state of emergency in Kentucky on March 6, 2020. And Governor Beshear has ordered and/or recommended closures similar in scope to the orders and recommendations made by Governor DeWine, and on March 22, 2020, Kentucky also issued an Order requiring all retail businesses that are not "Life Sustaining Retail Businesses", as defined in the Order, to temporarily close for business.
While the health and safety of the US populace is of primary concern, the economic and legal implications of COVID-19 have already proven to be significant, particularly in the commercial real estate context. The mandated closures have left landlords and tenants concerned about the enforceability of lease obligations (especially with respect to the obligation to pay rent); purchasers and sellers concerned about meeting the timelines set forth in contracts of purchase and sale and the logistics of closing; borrowers and lenders concerned about the fulfillment of loan obligations; and builders and owners concerned about timely completion of construction projects. KMK stands ready to advise clients on these areas of concern. This post focuses on a legal doctrine that affects each of these concerns: force majeure.
First, we explain what is meant by force majeure and lay out a framework for determining whether COVID-19 constitutes a force majeure event. We then discuss application by Ohio and Kentucky courts of (i) force majeure provisions and (ii) the doctrine of impracticability of performance in the absence of a force majeure provision in an agreement or lease. Finally, we discuss force majeure considerations in the construction law context.
What is a Force Majeure Clause?
A force majeure clause is a common boilerplate provision in commercial contracts. Although many leases incorporate a force majeure clause, the clause is less common in purchase contracts and loan documents. The clause allocates the risk of supervening events outside of a party’s control and may excuse a party from timely performance of its obligations if timely performance is impossible, impracticable or not serving the agreement’s primary purpose. The clause typically has both a specific list of events outside of a party’s control (such as government acts, inclement weather, war, and acts of God) and a more general statement that includes as force majeure “any other factors beyond the party’s reasonable control.” The clause may also include notice requirements and/or duties to mitigate damages.
A Framework for Determining whether COVID-19 Constitutes Force Majeure
The following framework can assist in determining whether COVID-19 constitutes force majeure and therefore excuses performance of a party’s obligations:
- Does the contract include a force majeure clause?
- If so, does the force majeure clause include language that would encompass COVID-19? Is a pandemic, epidemic or public health emergency one of the specifically-enumerated list of events constituting force majeure; or does COVID-19 fall under the language for more general “governmental actions” or “causes beyond the party’s reasonable control”?
- Is COVID-19 the actual cause of the party’s inability to perform? What is the standard for force majeure – impossibility, impracticability, hindered, impeded?
- Are there any exclusions or exceptions that prevent application of force majeure? The specific language of the force majeure clause is a key consideration. A party’s payment obligations are often carved out of a party’s ability to utilize force majeure provisions as a reason for delaying performance.
- What are the risks of declaring force majeure? Consider any termination rights and litigation risks.
- If a party is exercising a right to suspend performance under a force majeure clause, the burden will be on the party asserting the right and it will be key to comply with the terms and conditions of the clause, including any notice requirements and any duty to diminish the impact or shorten the duration of the force majeure event.
Interpretation of Force Majeure Clauses by Ohio Courts
There is limited Ohio case law interpreting force majeure clauses, but Ohio courts have made a few key principles clear. First, a party seeking to invoke a force majeure clause must prove that the event was beyond the party’s control and without its fault or negligence. In addition, force majeure provisions may not be invoked merely because performance may prove difficult, burdensome, or economically disadvantageous. See Stand Energy Corp. v. Cinergy Servs., 760 N.E.2d 453 (Ohio Ct. App. 2001).
When a force majeure clause is broadly written to include any event “not reasonably within the control” of a party, Ohio courts will give effect to such language without requiring the specific event to be described. See Haverhill Glen, LLC v. Eric Petroleum Corp., 67 N.E.3d 845 (Ohio Ct. App 2016). When specific events of force majeure are enumerated, courts will evaluate whether the event in question is similar to the enumerated events. See Dunaj v. Glassmeyer, 61 Ohio Misc. 2d 493 (Ohio Ct. Com. Pl. 1990).
In the absence of a force majeure provision, Ohio courts have excused performance due to an impracticability defense when a government mandate prohibited performance, but Ohio courts have not excused performance due to labor troubles. See Paramount Supply Co. v. Sherlin Corp., 16 Ohio App. 3d 176, 475 N.E.2d 197 (1984); and Universal Coal Co. v. Old Ben Coal Corp., 32 Ohio App. 254, 167 N.E. 904 (1929). However, each of these cases primarily involved the sale of goods, so it remains to be seen if courts will hold differently in the real estate context. In any event, distinguishing occasions that warrant excuse from performance in the absence of an express contractual provision depends on the facts of the particular case.
Interpretation of Force Majeure Clauses by Kentucky Courts
Kentucky law is similarly sparse with respect to interpretation of force majeure clauses, but a few cases are instructive. Kentucky courts view force majeure events as overpowering, superior or irresistible forces beyond the reasonable control of the parties that cannot be avoided by the exercise of due care; force majeure is not mere normal market risk. See Miller Bros. Coal, LLC v. Consol of Ky., Inc. (In re Clearwater Natural Res., LP.), 421 B.R. 392 (Bankr. E.D. Ky. 2009). However, Kentucky courts have upheld deviations from this definition when the parties negotiate different language in an arm’s length transaction evidenced by a written contract. SeeKentucky Utilities Co. v. South East Coal Co., 836 S.W.2d 392 (Sup. Ct. Ky. 1992). The party asserting force majeure has the burden of proof. See Gorman v. Lusk, 109 S.W.2d 625 (App. Ct.. Ky. 1937).
Also, Kentucky courts have held that force majeure clauses do not have to be bilateral to be enforceable; the clause can be in favor of only one party. See Wickliffe Farms, Inc. v. Owensboro Grain Co., 684 S.W.2d 17, 19 (App. Ct. Ky. 1984).
In the absence of a force majeure provision, Kentucky courts have historically been hesitant to excuse performance based upon an impracticability defense, and it is generally difficult to prove a sufficient causal link between the force majeure event and the nonperformance. See, e.g., Kentucky Lumber & Millwork Co. v. George H. Rommell Co., 257 Ky. 371, 78 S.W.2d 52 (1934); Ross Seed Co. v. Sturgis Implement & Hardware Co., 297 Ky. 776, 181 S.W.2d 426 (1944); Wickliffe Farms, Inc. v. Owensboro Grain Co., 684 S.W.2d 17, 19 (App. Ct. Ky. 1984); Bates Mach. Co. v. Norton Iron Works, 113 Ky. 372, 68 S.W. 423 (1902); Heidelberg Brewing Co. v. E.F. Prichard Co., 297 Ky. 788, 180 S.W.2d 849 (1944); and Tradewater Coal Co. v. Lee, 24 Ky. 215, 68 S.W. 400 (1902). However, as with the Ohio cases, each of these cases primarily involved the sale of goods, so it remains to be seen if courts will hold differently in the real estate context. In any event, distinguishing occasions that warrant excuse from performance in the absence of an express contractual provision depends on the facts of the particular case.
We would anticipate that a party negatively impacted by the COVID-19 pandemic will seek to assert governmentally ordered closures and the like as a defense or reason for the delay in the to performance of contractual obligations in absence of specific force majeure contractual provisions.
Construction Contract Considerations
COVID-19 and force majeure are of particular concern for owners, builders and architects in the construction law context. The AIA suite of contract documents are widely used throughout the construction industry, and AIA Document A201-2017 (General Conditions of the Contract for Construction) includes the following force majeure clause as Section 8.3.1:
If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with [other provisions of the A201], or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.
Section 8.3.1 identifies specific delay events which may entitle the contractor to reasonable extensions of time, but Section 8.3.1 leaves open the possibility of the contractor seeking additional compensation from the owner for such delays.
Case law interpreting Section 8.3.1 is enlightening. Courts have held that a contractor may be entitled to an extension of the Contract Time under certain circumstances, even absent an executed change order. See Allstate Interiors & Exteriors, Inc. v. Stonestreet Constr., LLC, 907 F. Supp. 2d 216, 237 (D. R.I. 2012); Bd. of Educ. of Woodford Cnty. v. D.W. Wilburn, Inc., 2010 WL 2010760, 4 (App. Ct. Ky. 2010); and Bouchard v. Boyer, 1999 WL 335845, 4 (Super. Ct. Conn. 1999). Interpreting earlier versions of the AIA A201, some courts have held, based on the specific facts in question, that the contractor’s exclusive remedy for construction delays is an extension of the Contract Time – absent a finding that the owner was negligent, acted in bad faith, or breached an implied promise not to delay the work. U.S. ex rel. Straus Systems, Inc. v. Assoc. Indemnity Co., 969 F.2d 83, 85 (5th Cir. 1992). Finally, some courts have construed the AIA A201 language as an indication that the parties anticipated the possibility of delays and fully provided for such delays with an extension of time. Burgess Constr. Co., v. M. Morrin & Son Co., 526 F.2d 108, 114-15 (10th Cir. 1975).
In analyzing Section 8.3.1, it appears that delays related to COVID-19 would fit within the “unusual delay in deliveries” and “other causes beyond the Contractor’s control” language from the base form of AIA-A201, entitling the contractor to a reasonable extension of time. However, the language of Section 8.3.1 does not expressly indicate whether the contractor is entitled to additional compensation for such delays, and it remains to be seen whether courts will provide this remedy to contractors. Keep in mind that the base language of the AIA construction documents is often negotiated by the parties, and it will be key to review the specific language in the particular contract.
In summary, with the delays and closures associated with the current COVID-19 Pandemic happening daily over the last week, we expect many clients and businesses will be receiving requests or making demands for relief based on force majeure clauses in the particular contract, lease or instrument, and in the absence of such provisions, would anticipate a rise in claims in the real estate context based on legal theories of impossibility of performance and the like as businesses seek to weather the storm during this uncertain period affecting the ability of many businesses to operate and generate revenue. While there will likely be litigation involving a number of these certain claims for relief based on force majeure or impracticability/impossibility of performance, a practical approach will often be appropriate for the contracting parties to work through difficult situations negatively impacting both parties..
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