Tyler Davis, CPA, MTA Asset Manager & Advisor, SVN - - PowerPoint PPT Presentation

Note: the following should not be construed as and should not be relied upon as legal advice.

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

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

• ther 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,
• r 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