Generally buried at the end of various types of real estate agreements (leases, purchase and sales agreements for real estate, construction contracts, loan agreements, etc.) is the “miscellaneous” section that covers and addresses so-called “boilerplate” provisions – such as venue for contractual disputes, representation as to authority to sign documents, jury trial waiver language, etc. Since these are generally considered “standard” provisions, it may be tempting to focus less intently on these provisions when negotiating these documents. However, overlooking or downplaying the potential impact of these provisions may have a significant adverse effect.
One of these provisions is the “force majeure” clause. This clause generally serves to excuse a party from performing under an agreement if an event occurs that is beyond the reasonable control of such party and such event delays or prevents performance, such as severe weather conditions, storms, hurricanes, fire, explosions, earthquakes, strikes, war and terrorism. However, it is important to note, that generally, unless specifically stated otherwise, only non-monetary obligations are excused due to a force majeure event. As a consequence, for example, a borrower under a loan will still have to make loan payments in a timely fashion even if his or her business was impacted by a storm.
As it is the case with other legal clauses, the expression “the devil is in the details” rightfully applies when negotiating force majeure provisions. Some items to consider, and possible consequences if omitted, are as follow:
- Make Application Mutual – The benefit of excusing performance due to force majeure should apply to both parties. Sometimes an agreement may only have the clause run in favor and to the benefit of the drafter of the agreement. To quote another proverb – “what is good for the goose is good for the gander” – should apply in the force majeure context. Why should only the landlord, but not the tenant, be excused from undertaking repairs when there is a shortage of building materials? The tenant should not be at risk to defaulting under its lease because it could not timely complete repairs due to no fault of its own.
- Enumerate Specific Force Majeure Events that Are of Concern – In addition to listing the standard type of events that are subject to a force majeure clause (such as a storm or acts of terrorism), it will be important to include specific events, in light of a party’s line of business, which, if affected or impacted, may cause a delay in performance. For example, if a contractor constructing a building faces a risk that it cannot obtain a specific construction material, then it should seek to include “shortages of such material” as a force majeure trigger. However, from the owner’s perspective, especially in a construction contract setting, the owner may not want to agree to such an inclusion since the contractor, not the owner, should assume the risk of not obtaining sufficient materials in a timely fashion. To mitigate the risk of omitting the enumeration of a specific force majeure event, it would be advisable to attempt to describe the qualifying events under the proviso of “including, but limited to,” in the contract (e.g., the events that qualify as a force majeure event include, but are not limited to, storms, hurricanes, etc.). This will allow, or at least give the party seeking to invoke force majeure, a stronger position that the event in question that resulted in the delay in fact qualified as a force majeure event.
- How long is the Performance Excused? – The force majeure provision should specifically state that performance is excused, at a minimum, for the same period of time that the force majeure event lasts and continues to delay performance. Some force majeure provisions do not address the length of excused performance – instead they only state that performance is excused – so it is important to have that clear in the agreement to avoid any ambiguity or argument in that respect (although disagreements may still arise as to when the force majeure event effectively ceased and performance was again viable). Further, some contracts – especially in relationships where one party may have less leverage than the other party (usually in a borrower / lender relationship) – may attempt to limit the period that non-performance is excused due to force majeure (e.g., a period not to exceed 90 or 180 days). This represents a potential concern in a context where the force majeure event continues beyond that time limitation and the resulting continued non-performance may trigger a default under the respective contract. Accordingly, if possible, it would be advisable to not acquiesce to such a cap or, at least, negotiate a sufficiently lengthy cap period.
- Notice of Force Majeure – A contract may require that the party claiming force majeure give notice to the other party of the event it claims qualifies as a force majeure event and that such notice be given within a certain period of time (usually 5-10 days after the force majeure event / knowledge of the event). Further, the notice may need to be accompanied by sufficient evidence that, in fact, a force majeure event has occurred. This presents several potential issues. First, it is extremely important to give such notice timely so as not to lose the right to excuse non-performance and risk a potential breach or default under the contract due to such non-performance. Second, the timeframe to give notice should commence once the party knows (or should know) of the force majeure event, not necessarily when the force majeure event actually occurred, as there may be a gap or delay between those two occurrences. For example, if there is a strike that results in material shortage, the contractor may not be aware of such impact until a certain time period following the strike. As above, the importance is that the party seeking to invoke force majeure not lose such right and risk a potential breach of the contract. Finally, one may want to delineate what evidence needs to be provided to claim force majeure. When an impactful storm occurs, providing the evidence may be easy. But what about the strike and resulting material shortage – what does the affected party have to show to qualify such an event?
Although a party will hopefully never need to invoke the rights under a force majeure clause, this provision serves – in accordance with the phrase, “plan for the worst, hope for the best”, – as a crucial form of protection if an event occurs outside the control of a party which impacts performance under the contract. Therefore, it is crucial to not overlook this clause, as well as other “standard” boilerplate provisions in real estate agreements.
For example, recently an event occurred which required a Golenbock client, a real estate developer, to claim the force majeure to protect its interests. The developer had taken a complex construction loan for a luxury residential condominium project in Florida. As it is customary for these types of projects and loans, the lender conditioned continued construction funding on the borrower meeting and satisfying certain construction deadlines – not only that current deadlines are met, but also that future deadlines (including the final completion date) are anticipated to be met – in light of the current state and progress of construction.
Shortly after the closing of the loan, however, Hurricane Ian devastated southwest Florida. This natural disaster not only damaged the project built to date, but also impacted future construction and would result in the construction deadlines being missed and could have triggered a default under the loan had not the developer been protected by a mutual force majeure clause in the loan agreement. The initial draft of the loan agreement contained a force majeure clause which only excused performance by the lender, but not the borrower for force majeure events. However, the final, negotiated version made the force majeure clause mutual and therefore the developer was also protected. By negotiating what many think of as the boiler plate part of the loan agreement, we were able to shield our client from a possible loan default and entitled the client to receive extensions of time due to the delays caused by Hurricane Ian.
This article was written by Florian Ellison, Partner, Golenbock Eiseman Assor Bell & Peskoe LLP.
Golenbock Eiseman Assor Bell & Peskoe LLP
Golenbock Eiseman Assor Bell & Peskoe LLP is a full-service Manhattan-based business law firm of approximately 60 attorneys which has served its clients’ complex litigation, corporate, reorganization, intellectual property, real estate, tax, and trust & estate needs for 40 years. The firm takes pride in its sophistication, experience, and ability to take on major engagements for its domestic and international clients while also maintaining a hands-on, personalized approach to all matters.
The firm represents entrepreneurial, portfolio, and institutional clients, ranging from start-ups to Fortune 500 companies, with a specific focus on the mid-market segment. Corporate clients include middle-market private corporations, public companies, private equity firms, venture capital firms, individual investors, and entrepreneurs on a global scale.
Golenbock is a member of the Alliott Global Alliance, which was named to Ba1 of global law firm alliances by Chambers Guides, the prestigious international legal survey. Alliott numbers 215 firms in 94 countries on six continents, and helps member firms partner with others in countries around the globe.