By Mark H. Dahlmeier and Jesse J. Hap
There is no doubt that COVID-19 is affecting every industry and market across the globe. Many impacts of the pandemic remain to be seen, but buyers, sellers, landlords, and tenants of residential and commercial properties are already experiencing some of the consequences.
Many buyers are wondering if it’s possible that COVID-19 could get them out of a signed real estate contract that is pending closing. This is a fair question, especially for buyers who were planning to liquidate stock market investments to finance some part of their transaction, since these investments have likely decreased in value. Accordingly, it’s only a matter of time until attorneys and their clients turn to “Force Majeure” clauses to attempt to extend deadlines or terminate a contract.
Can a purchaser of a residential property use the Force Majeure clause to terminate a purchase and sale contract?
The answer depends on many variables. First, let’s look at the Force Majeure provision in the “AS IS” Residential Contract For Sale And Purchase since this contract is used for the large majority of residential real estate transactions in Palm Beach County, Florida. This provision is contained in Paragraph 18(G), and shown below:
G. FORCE MAJEURE: Buyer or Seller shall not be required to perform any obligation under this Contract or be liable to each other for damages so long as performance or non-performance of the obligation, or the availability of services, insurance or required approvals essential to Closing, is disrupted, delayed, caused or prevented by Force Majeure. “Force Majeure” means: hurricanes, floods, extreme weather, earthquakes, fire, or other acts of God, unusual transportation delays, or wars, insurrections, or acts of terrorism, which, by exercise of reasonable diligent effort, the non-performing party is unable in whole or in part to prevent or overcome. All time periods, including Closing Date, will be extended a reasonable time up to 7 days after the Force Majeure no longer prevents performance under this Contract, provided, however, if such Force Majeure continues to prevent performance under this Contract more than 30 days beyond Closing Date, then either party may terminate this Contract by delivering written notice to the other and the Deposit shall be refunded to Buyer, thereby releasing Buyer and Seller from all further obligations under this Contract.
It is important to note that this provision explicitly lists the events that constitute a Force Majeure. Further, it permits the extension of all time periods—or an outright termination of the contract—depending on the situation.
In order for the Force Majeure provision to apply and extend deadlines or terminate the contract, three things must happen: (1) some event must occur which constitutes a Force Majeure; (2) the Force Majeure event must cause a party’s performance obligations, or the availability of services essential to Closing, to be disrupted, delayed, or prevented; (3) the non-performing party must be unable to overcome the Force Majeure event despite the exercise of “reasonable diligent effort.”
A Court could determine COVID-19 is a Force Majeure event if it deems COVID-19 an “act of God” under the contract. Assuming a Court does this, the next element is harder to prove; as long as parties can still perform their obligations under the contract, the mere existence of COVID-19 will not allow a party to extend deadlines or terminate the contract. For example, so long as the buyer can find title agents, lenders, inspectors, appraisers, surveyors, and other professionals necessary to the transaction who are willing and able to do their jobs, the buyer’s performance is not prevented in a manner which the buyer can’t “overcome”. However, COVID-19 is changing the landscape hour by hour, and these professionals—as well as buyers themselves—might find themselves ordered to stay in place, their businesses closed, or their property associations unwilling to allow non-residents into communities.
Can a purchaser of a commercial property use the Force Majeure clause to terminate a purchase and sale contract?
Again, the answer is a resounding “it depends.” Commercial purchase and sale agreements are heavily negotiated. Thus, there is no standard form contract used and the Force Majeure provisions will vary from one contract to another. A buyer or seller wanting to terminate a commercial contract due to COVID-19 will need to have their attorney read the specific contract language and ask questions similar to the residential analysis above. Would COVID-19 constitute a Force Majeure according to the plain language of your contract? Does the contract even have a Force Majeure provision? Is COVID-19 preventing a party’s performance somehow? What remedies are permitted under the Force Majeure provisions? In order to determine whether the contract can be effectively terminated, these questions will need to be answered.
Buyers, sellers, landlords, and tenants of commercial properties should be aware that there are a vast amount of other considerations in regard to COVID-19 and its impact on a transaction or existing lease. For example, insurance coverages, operating covenants and restrictions, default provisions, and co-tenancy provisions should be reviewed and understood by all parties involved.