Thomas P. Wert, Esq. Shareholder, Dean Mead twert@deanmead.com Gary Ralston, CCIM, SIOR, CPM, CRE, CRRP, FRICS Managing Director, Owner, SVN Gary.Ralston@svn.com Tyler Davis, CPA, MTA Asset Manager & Advisor, SVN tyler.davis@svn.com Note: the following should not be construed as and should not be relied upon as legal advice.
POLLING QUESTION #1 • What is your background/reason for joining the webinar? • Tenant • Landlord • Agent/Broker • Investor
OVERVIEW • What is Force Majeure • Introduction • Force Majeure in Practice • Florida Case Law • Real Estate Contracts • Commercial Leases • Construction Contracts • Impossibility, Frustration of Purpose, Impracticability • Impact on Landlords & Tenants
FORCE MAJEURE • Excuses contractual performance as a result of unforeseen circumstances outside of the parties’ control • Contained in many commercial contracts • Traditionally an “Act of God” but today can be more • Force majeure = superior or irresistible force • Narrow exception to rule that parties are bound to perform their obligations under a contract
FORCE MAJEURE • What Constitutes a Force Majeure Event? • Concept has developed over time • Early on = “physically impossible” • “Frustration of Purpose” • New standard of “Commercial Impracticability” • No uniform set of events constitute force majeure
FORCE MAJEURE • Force Majeure in Practice • Start with contract between parties • Does a force majeure clause exist? • If so, courts will enforce clear and unambiguous clauses • Suspend performance • Grant extension of time to perform • Reduce or eliminate damages resulting from failure to perform
FORCE MAJEURE • Broad Provisions vs. Narrow Provisions • Broad • Benefit = provide flexibility • Negative = difficult to predict a courts interpretation • If too broad, it may buffer a party against the normal risks of the contract • Narrow • Provide a list of specific events • Contract typically state the list is not exclusive (“including without limitation”) • Provides clarity to parties • “epidemics” or “pandemics” are not commonly found • Court’s are hesitant to apply to situations not listed
FORCE MAJEURE • Florida Case Law • Florida courts have upheld force majeure clauses • Contractor = excessive rain • Contractor = president suffered a heart attack • Paper Company = design error
FORCE MAJEURE • Florida Realtor & Florida Bar Clause • Narrow provision does not include epidemics or pandemics • Court may be reluctant to excuse performance due to COVID-19 • But list does include an “Act of God” • What constitutes an “Act of God?” • COVID-19 Excusing Performance? • Failure to perform must also be due directly, exclusively, and contemporaneously with the pandemic
FORCE MAJEURE • Commercial Lease Clauses • Florida Federal Court Evicted Nursing Home over unpaid rent • Force Majeure clause in lease • Tenant argued government actions led to lost revenue • Court found tenant failed to prove its failure to pay rent was the result of the government funding change, as contemplated by the force majeure clause • Court relied upon cases which have rejected force majeure arguments when event merely created financial hardship • Force majeure is not intended to buffer a party against lost profits • Cases outside Florida have excused performance under commercial leases • Examples from 9/11
FORCE MAJEURE • Construction Contracts • Extension of time to complete a project if conditions cause a delay in performance • AIA A201 contract form clause: • “If the Contractor is delayed at any time in the commencement or progress of the Work … by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions [which are unforeseen and abnormal], or other causes beyond the Contractor’s control; … [or] by other causes that … justify delay, then the Contract Time shall be extended for such reasonable time ….” • Florida courts have upheld such broad force majeure clauses • Other provisions in AIA contracts deal with delays, suspension, and termination of the contract. • Thorough review is critical
FORCE MAJEURE • Impossibility, Frustration of Purpose, & Commercial Impracticability • What if your contract does not contain a force majeure provision? • Defenses • Impossibility of Performance • Frustration of Purpose • Commercial Impracticability • Florida Court interpretations – not merely inconvenient, profitless, or expensive • Fact specific inquiry
FORCE MAJEURE • Closing Thoughts • COVID-19 is an unexpected, unforeseeable, and uncontrollable event • First pandemic of this magnitude in over 100 years • Party only excused if the language clearly & unambiguously relieves the party of performance • Real Estate contracts, commercial leases, and construction contracts – not impossible to perform • Not so “excessively or unreasonably difficult or expensive” as to be deemed impracticable • Tenant may argue Governor’s Exec. Orders closed business rendering impossible to use premises • But, economic hardship from event is not enough • A real estate buyer may argue impossible to close • But, real estate services, including closings, are deemed essential in the Governor’s Order.
FORCE MAJEURE • Impact on Leases • Tenant • Landlord • Rent abatement requests
LANDLORD TENANT ISSUES • Different impact on each property type • Retail ... Big difference between enclosed malls, retail shopping centers and freestanding • Most enclosed malls are closed … Landlord may have liability to tenants … may change forever • Strip centers and freestanding retail will recover quickly • Office buildings … generally open and operating at building level • Multifamily … operating … rent collection is biggest issue • Industrial … very little impact • Hospitality … disaster • Different subject, not multitenant platform more of a financing issue • Most Landlords holding firm that rent is due … especially for tenants who are not closed
LEASE • Lease language is typically in favor of Landlord • Pandemic or epidemic rarely mentioned • Overall downturn in economy is probably not applicable • Impossibility of performance • Apply to closed malls • Quite Enjoyment … may apply if Landlord closes access to property • Co-Tenancy clauses … issue for retail • Percentage rent … obviously an issue when store is closed
BUSINESS ISSUES…INDUSTRY SURVEY • April rent collection … about 2/3 of tenants paid rent • About 50% of Tenants asked for rent deferral/abatement • Extension of lease … or spread over defined period • National tenants … about 1/3 asked for rent deferral/abatement • Response was about 50% … no concession • About 50% granted some deferral, tenant pays over time • Only about 20% of Landlord have send default notice to non-paying tenants • About 75% of Landlords made April mortgage payment • 15% or so of Landlords do not have a loan • About half of Landlords asked Lender for flexibility … over 50% of lenders have offered some flexibility • 60% think that stay-at-home mandate will be lifted by end of May • 2/3 believe that general public will resume shopping and eating out within 4 to 6 weeks
WHAT TO WATCH OUT FOR • Landlord and Tenants need to work together … be reasonable • Tenants need to understand that Landlords have mortgage to pay • Government sponsored program for commercial mortgage relief • Tenants may have insurance recovery via business disruption insurance • Tenants should consider how “stimulus package” helps them cover costs and expenses … including rent • Tenants should not think that rent is their least priority • Good news • Starbucks may lead recovery … people miss small luxury • Apparel may struggle … feel-good will be best performer • Tourism • Look at recovery after 9/11 as example • There will be a bounce back … people do want to get out, so tourism will recover sooner
QUESTIONS? Thomas P. Wert, Esq. Shareholder, Dean Mead twert@deanmead.com Gary Ralston, CCIM, SIOR, CPM, CRE, CRRP, FRICS Managing Director, Owner, SVN Gary.Ralston@svn.com Tyler Davis, CPA, MTA Asset Manager & Advisor, SVN tyler.davis@svn.com For more COVID-19 resources, including prior webcast recordings, please visit: svnsaunders.com/coronavirus
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