COVID-19 Considerations in Single-Family Developments and Force Majeure ProvisionsApril 1, 2020
First and foremost, everyone at The Watson Firm sends best wishes to our clients, contacts, and friends during this unprecedented and difficult time. If we can help in any way, please get in touch.
To say that the last week in March 2020 looks very different than the first would be an understatement.
We’ve been getting a lot of questions in the last few weeks, such as “What do we do about our acquisition contracts/construction contracts/builder contracts?” and “What do social distancing and shelter in place mean for our projects?”
While there’s no one-size-fits-all answer, here are some general thoughts:
- One expression that we keep hearing is, “Hit the ‘pause button.’” As many buyers aren’t ready to go hard on new deals and builders are hesitant to acquire additional lots in a time of great uncertainty, we’re seeing them exercise extension options and negotiate extensions of feasibility periods and closing dates in order to see how things play out in the next 30-90 days.
- In that same vein, if a developer’s revenue from lot or commercial parcel sales is going to be delayed or curtailed, it may make sense to re-evaluate the status of ongoing development work. Do the construction contracts allow the developer to terminate for any reason, or – perhaps more appropriately – suspend work? Is there a “force majeure” provision allowing either party to delay performance due to a pandemic? These provisions may give the developer some relief from incurring additional construction costs while revenue isn’t coming in.
- Speaking of force majeure clauses (and more details on these provisions below), a developer with obligations to deliver lots may want to examine any force majeure clause in builder contracts. There may also be built-in options to extend lot delivery dates for any reason. Either of these types of provisions may give the developer flexibility to complete lots later than expected and to defer some expenditures, but still in accordance with the contract, so that the builder’s remedies for untimely delivery of lots aren’t triggered.
- Finally, consider whether welcome centers, amenity centers, parks and other common spaces, model homes, and even construction sites may continue to operate while “shelter in place” orders are in effect. Keep in mind that these orders vary across states, cities/towns, and counties; they are put into effect and are modified frequently; and best practices may be more restrictive than the orders.
Force Majeure Provisions:
Force majeure provisions have arguably gotten more attention in the last two weeks than in the last decade combined. Not only are we looking at existing force majeure provisions, but we are also considering how to best draft these provisions for future contracts. A force majeure provision contains a number of components, and how to approach each depends on whether you’re the party more, or less, likely to invoke the protections of the provision:
- Is the force majeure provision triggered by the COVID-19 pandemic? Some force majeure provisions specifically call out pandemics and epidemics (although this is not very common in our experience), but most only more broadly refer to “acts of God.” Most have catchall provisions incorporating events that are “beyond the reasonable control of” a party. Whether COVID-19 constitutes – legally – an act of God – depends on the jurisdiction, so in order for a force majeure provision to be triggered by COVID-19, a specific callout of a pandemic/epidemic, or a catchall provision, is likely the path of least resistance.
- Can you successfully invoke the force majeure provision? Does performance have to be deemed “impracticable,” “impossible,” “illegal” or something else in order for performance obligations to be extended? In the era of COVID-19, that distinction may make a difference and may depend on factors such as where the project is located and whether state law or local ordinances prohibit performance.
- Does the party seeking to extend performance timing need to give notice in order to invoke the provision? If notice is required, the form it’s required to take (written versus oral, means of delivery, etc.) and any time requirement (e.g., within five business days of the commencement of the force majeure event) are important considerations.
- Is the period in which a party can delay performance capped? Force majeure provisions are often capped so that the period of delay cannot extend indefinitely (we occasionally see a cap of 90 or 120 days). The duration of the COVID-19 and its impact related to a force majeure delay are wild cards, but the party seeking to extend performance should consider that it may extend past any permitted periods of delay in the force majeure provision.
These are, of course, general answers to general questions. If you are facing any of these issues and need to discuss your specific situation, please do not hesitate to contact us.