While we hope the virus will soon be a thing of the past, some contractual clauses and issues are bound to become part of the new norm for real estate professionals. As a result of the lessons learned from the pandemic, most real estate contracts such as leases, financial documents and contracts require consideration of new clauses that are likely to remain in effect.
No provision has been scrutinized more closely in the months following the March 2020 quarantine than the “force majeure” provision (a provision that, under certain circumstances, can either exempt or postpone the fulfillment of contractual obligations). Throughout the pandemic, medical practitioners have tried to interpret and rethink force majeure provisions to determine whether a pandemic qualifies as force majeure. Conversely, if the contract not include a force majeure clause, for example, almost everyone in California quickly reads section 1511 of the California Civil Code, which is California’s default force majeure statute and applies to contracts without explicit force majeure clauses.
Until 2020, it is likely that few real estate contracts explicitly specify a force majeure event, including pandemics or epidemics. Today, almost all force majeure clauses necessarily include such events, and in some cases practitioners may consider including other uncontrolled events – perhaps cyberattacks and certainly civil unrest. To this end, due to a heightened sense of surprise, there is a growing tendency to broaden the definition of force majeure as much as possible.
The effect of government regulations.
During a pandemic, authorities generally issued two types of regulations: stay-at-home orders requiring temporary restraint or closure of non-essential businesses; and an eviction moratorium, which prohibits homeowners from taking action to evict non-paying tenants and gives eligible commercial tenants the right to defer rental obligations until the end of the emergency period.
As a result of lessons learned from couch orders, retail tenants have been encouraged to negotiate, demanding rent reductions in leases if government orders result in them being unable to operate at full or full capacity. This trend started with large restaurants with multiple offices and quick service tenants, and is now often asked about even by small retail tenants such as independent yoga studios and gyms. Going forward, lessees’ emission reduction rights, which were written specifically with COVID-19 in mind, can be applied to use and employment restrictions from any government regulation to insure against future stops. The same concept applies to rental clauses relating to the cost of common areas in multi-tenant projects.
By now, both landlords and tenants are aware of the imposed moratoriums on evictions. While this is challenged on different legal grounds in many jurisdictions, parties are required to comply with the moratorium rules and, for the most part, come to an understanding of the protections (and restrictions) imposed by the moratorium.
Unable to pursue non-payment of eligible commercial tenants, landlords began looking for guarantors to collect late rent. Going forward, homeowners negotiating a lease will ensure that the commercial lease guarantee does not restrict them from suing the guarantor in circumstances where applicable law may prevent the tenant from paying the rent on time.
The COVID economy has meant fewer people shop in person and instead, almost everything is delivered, whether by post or food and grocery delivery services. As a result of the increased demand for delivery due to the load on the infrastructure of our country, there have been many delays.
Another new pandemic clause that will be standard in most sales contracts and financial transactions are events that can delay the closing of a transaction.
Missing a closing date can have serious financial implications Unexpected events that delay the delivery of packages to the escrow holder, buyer, seller, lender or legal advisor, or lead to the closure of the offices of the escrow holder or the title company that affect the closing date or other key settlement date, are now sometimes dealt with in agreements. This so-called “blocking event” provision is also sometimes applied to conditions that prevent the lender or buyer from transferring funds.
The new regulation stipulates that the closing date or other key execution date is extended to two business days after the blocking event is eliminated.
Just as the term “social distancing” will continue to be a part of our spoken language, these and other contractual clauses will become commonplace in real estate contracts.
Sargis Harutyunyan – attorney at Greenberg GluskerReal estate group.