Effects of COVID-19 on real estate, construction and supply contracts | Smith Anderson

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As the coronavirus (COVID-19) continues to disrupt lives and businesses, it’s important to consider how it can affect your real estate, construction, and utilities businesses. Every situation and contract will be different, so it’s important to consider your exposure and know how to respond.

That could happen to you. . .

The duration and extent of the impact COVID-19 will have on the real estate and construction sectors are unclear, but it will have an impact.

  • Construction projects There may be a shortage of manpower and material, crews may be restricted in on-site activities or barred from entering a location, or payment interruptions may occur.
  • Tenant equipment can be delayed, disrupting access to new office space and causing problems leaving previous rental space. Tenants can be late with the rent or the percentage rental income can decrease due to less economic activity. Tenants can try to exercise termination clauses because they are denied access to rental space.
  • Suppliers There may be interruptions in the supply chain, shortages of materials or shipping restrictions that affect their ability to fulfill orders, especially those originating in overseas markets.
  • Owner developer can be delayed in the implementation of projects, which affects access to rental space.
  • Lender may slow down in approving new loans or drawing on existing lines of credit, restricting access to such funds, or seeking additional collateral before a loan is granted.
  • State owners There may be delays in project rental or project suspensions as agencies divert their attention and resources to other locations or operational disruptions occur.
  • Municipalities can cease all personal activities and reduce meetings related to plan review and approval procedures or limit on-site inspections.

While these are just a few examples of how COVID-19 can affect the development and construction process, it is important to review your contracts to be prepared for possible events. Before you take action on an existing contract or enter into a new one, it is important to understand your rights and remedies, as well as those of the other contracting parties.

what is Force majeure? – and does it apply to COVID-19?

A contract Force majeure Clause may provide some relief to one or both parties if certain extraordinary events delay or prevent the performance of a party (including an extension of time, suspension, termination or compensation). Generally a Force majeure Clause can release a party from the fulfillment of its contractual obligations if certain events occur beyond the control of the party that prevented or hindered the fulfillment of the contract. As a result, a Force majeure Clause can be helpful to the party seeking remedial action, but can have serious consequences for the other party.

Commonly referred to as “acts of God,” the extraordinary events are one Force majeure Events are rare and not reasonably foreseeable. They typically affect matters such as war, natural disasters, government orders preventing performance, and potentially global pandemics. It is possible that a Force majeure Clause lists specific events that a. form Force majeure Event, or it can simply refer to events beyond the control of the parties.

Force majeure Clauses can be found in all types of contracts, including construction contracts, rental contracts, supply contracts, and commercial loan contracts. While these clauses are often headed “Force majeure“Or the term itself is used in the body of the text, this is not always the case. For example in AIA 201TM – 2017, a form construction document often used between owners and general contractors, the term Force majeure never appears. Instead, this AEI form is aimed at Force majeure by listing a series of events which, if they occur, could cause a party to request an extension of the time limit. Other industry contracts take a similar approach. Instead of seeing one Force majeure Contains a clause, your contract may contain a clause that simply lists a number of exceptional events. This is where you can see if your contract covers events such as a pandemic.

A party’s ability to obey Force majeure is contract and fact-specific. If the contract contains such a clause, the next step is to determine whether COVID-19 falls under the definition of a. falls Force majeure Event. For example is the Force majeure relate to an epidemic or disease so that COVID-19 may fall under the definition?

A party should not simply stop performing because it believes that: a Force majeure Event occurred. If there is a … Force majeure Clause, it is critical that the parties fully comply with all aspects of the clause, including notification requirements, documentation, mitigation requirements, and evidence that the event actually and significantly affected a party’s performance.

Looking for your contract for a Force majeure Deployment is the first step in the analysis. Understand how the courts can interpret a particular thing Force majeure Clause will be important. Alternatively, in the absence of a Force majeure There may be another legal reason for the suspension of the service or the termination of the contract.

If there is no force majeure clause in a contract, what then?

Impossibility or impracticability

If your contract does not a Force majeure Clause, certain legal principles of North Carolina law apply in the event that unforeseeable circumstances arise and make implementation impossible or impractical. A general financial emergency neither excuses the performance nor justifies the termination of the contract. Instead, there must be an event that has occurred that could not reasonably have been foreseen. Even without a Force majeure Clause, the terms of the contract can determine the outcome of a dispute over a rare event that makes performance impossible. If the parties have expressly considered the occurrence of a particular event and have agreed to place the risk for it on one of the parties, the fact that the event actually occurred does not release the party from its obligation to perform.

For example, let’s say that a party is required to supply lights made in China, but imports from China are halted due to a pandemic and it is not possible to source replacement lights from a third party (or it would be wastefully expensive). ). If the contract does not mean the risk of a pandemic or an officially ordered goods embargo for the obligated party, the obligated party can be exempted from the contract due to the impracticability doctrine.

Frustration of the goal

In addition to the impossibility or impracticability, there is also the doctrine of “frustration of purpose”. The two partially overlap: both concern events that were not reasonably foreseeable, and both come into play in contracts that do not Force majeure Clause or conditions that place the risk of the rare event on either party. The main difference is that impracticability means that fulfillment is impossible or nearly impossible, while the frustration of the purpose assumes that one party can still fulfill but would be unreasonable if the rare occurrence made the reason for the conclusion of the contract irrelevant . Suppose an organizer rents an arena for 20,000 people to hold a basketball tournament. If a tornado destroys the arena, the doctrine of impracticability applies and the organizer is released from the service and can terminate the contract. However, make another assumption: if the arena is rented out but the tournament is canceled due to COVID-19 concerns, the arena will still be able to be used for basketball games but the purpose of renting the building has been foiled. Therefore, the promoter can be excused according to the doctrine of frustration of purpose.

Steps You Can Take. . .

Every situation and every contract is different. If you are currently on an existing contract, call a Force majeure Clause or relying on the doctrines of impracticability or frustration of purpose should only be considered in extreme circumstances and should not be taken lightly. If either party believes that a rare, unforeseeable event has occurred, discontinuing performance or terminating the contract may be risky. If wrong, that party could harm itself.

Before entering into negotiations and entering into a new contract, taking action on an existing contract, or responding to another party who wants to take action, the first things to consider are the following:

  • Review your existing contracts. Does your contract explicitly contain a reference to illness-related delays such as quarantine, disease outbreak, epidemic or pandemic? Or does it just refer generally to events that are beyond the control of the parties? When searching for extensive contract documents, it can be helpful to search for terms such as “force majeure”, “events”, “failure of purpose”, “impossibility” or “impracticability”.
  • Reread the contracts you want to enter into, including the form or “boilerplate” contract language. Consider whether you a. add or revise Force majeure clause.
  • In addition to reviewing your contracts, talk to the other contracting parties and find out about potential barriers to performance that they may have now or in the future that could affect the value of their contract with you or your ability to perform a contract you have with someone else.
  • If you are a supplier or purchaser under a supply contract, also research your supply chain and consider contingency plans to resolve potential disruptions.
  • Review your insurance policies and speak to your insurance broker to determine if you have or need adequate business interruption insurance or other applicable coverage.
  • Speak with your lender to understand what actions they can take regarding loan closings, access to credit, or their business operations that could affect you.

As the COVID-19 outbreak unfolds we urge you to be safe and wish everyone the best of health and results. We also understand that protecting your business is of vital importance to you during this uncertain time. Accordingly, it is important to understand your legal rights and obligations before taking action or responding to actions taken by others.

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