As those in the real estate industry know, the novel coronavirus has slowed down the market for several reasons, including restrictions on personal and business activity as well as financial impacts from the related economic slowdown. Plus, some assumptions about future events on which current deals were based are now on shaky ground.
For example, will the market for office space shrink as more businesses learn that their employees can work adequately from home? Will retail space demands disappear while on-site retail activity has significantly migrated to on-line sales?
These and other unknowns in various market segments are fueling some uncertainties for parties to a variety of real estate contracts like purchase agreements or commercial leases. So, many are trying to negotiate changes to contract terms or attempt to get out of signed deals altogether. This problem has already resulted in a number of lawsuits across the nation, including in California, where the governor declared a State of Emergency on March 4.
Is the pandemic a force majeure?
One legal basis that some parties are trying to use in this context is that a “force majeure” clause in a real estate contract lets them off the hook from fulfilling the contract or allows them to perform differently such as by postponing deadlines. A force majeure provision in a contract says that if certain unforeseen, uncontrollable or unanticipated events or conditions would make contract adherence difficult, harmful or impossible, the parties may postpone performance or cancel the contract altogether.
For context, force majeure events have been historically referred to as “acts of God.”
An individual contract may define “force majeure” for purposes of that agreement. The force majeure provision may also include a list of specific events that fall within the definition. In the current pandemic, affected parties are arguing that the pandemic and its effects fall under the force majeure definition in their contracts – or if it’s not clear, can they logically shoehorn in COVID-19?
A local example
A lawsuit filed by Pacific Collective, a commercial real estate developer based in Santa Monica, against ExxonMobil is pending in the U.S. District Court in the Central District of California. Pacific Collective and ExxonMobil executed a $4.2 million purchase agreement for a large Culver City parcel on which Pacific Collective planned to develop a marijuana dispensary. ExxonMobil previously had a gas station there.
According to The Real Deal, Pacific Collective claims that because the pandemic falls under their force majeure clause, ExxonMobil violated that clause and therefore breached the contract when it refused to let Pacific move the closing date from Feb. 7 to March 31. The plaintiff argued that the California stay-at-home orders were a force majeure triggering event that prevented them from bringing in the professional services needed to begin the redevelopment of the property.
The defendant disagreed, asserting that construction and banking entities can still operate because they are essential businesses and that Pacific was really trying to move out the closing because of financial problems.
This case will be closely watched and is potentially important as a bellwether of how courts will handle force majeure arguments during the pandemic in real estate contract disputes. Any contractor, developer, investor, buyer or seller of commercial property or other entity facing contractual issues because of COVID-19 issues should speak with a real estate attorney as soon as possible to understand the potential legal remedies.