COVID- 19 PANDEMIC
All parties to real estate agreements are suddenly facing the unknown including, but not limited to the prospect of delays and disruptions due to COVID-19. The industry was certainly impacted after Sept. 11, 2001 and the 2008 financial crisis, but the COVID-19 crisis involves broader impact and emerging financial challenges. Additional demand side delays should be anticipated, such as homebuyers putting their plans on hold until times seem more certain, and then creating a surge in the market with a flood of new activity. With respect to existing contracts, all parties should review their contracts with legal counsel for relevant clauses and to make sure they issue any required notices. To remain ahead of identified concerns, Buyers and Sellers must reach out to ascertain potential sources of delay to ensure they give the proper notices. The COVID-19 threat is quickly-evolving and hitting different parts of the world at different times, so parties will want to require periodic updates because what is not impacted today could easily be impacted tomorrow as different areas issue additional restrictions and potentially go into “lockdown.” While each situation is different, some of the key contract clauses to consider are:
- Force Majeure Clauses.
Force majeure is an unforeseeable circumstance that prevents someone from fulfilling a contractual obligation. Most U.S.-based contract forms include force majeure concepts.. Federal Acquisition Regulations (FAR) and the ConsensusDocs forms expressly mention “epidemics” as an example of delay outside the control of the contractor, but even if epidemics are not specifically mentioned, the parties should be entitled to relief because the epidemic was “beyond the control” of that entity. Generally speaking, these clauses provide an extension of the contract time for delays caused by forces outside the control of the party, but establish no right to additional compensation. To obtain relief, the delay must be on the critical path of the process —i.e., it must cause an actual increase the duration of the work. Although force majeure clauses generally limit relief to an extension of the contract time, the contractor may still be entitled to additional compensation.
- Termination and Suspension Provisions.
General Conditions allow a party to terminate a contract if the work is stopped for a period of 30 consecutive days or more through no act or fault of the party, and expressly mentions an “act of government, such as a declaration of national emergency that requires all work to be stopped.” While the current declaration did not include a requirement that all work be stopped, this is a developing circumstance that requires attention for new conditions and directives that are being issued daily.
All project participants should be prepared for claims arising from COVID-19. To prepare for these claims, you should consult experienced legal counsel to review the relevant contracts and policies. As with everything on a real estate project, prompt and clear communication is necessary both to preserve rights and to mitigate impacts on the project. Notices must conform to all appropriate formalities, including the persons to whom the notices are addressed and the means of delivery. The notices should:
a) Explain how COVID-19 and government actions to slow its spread qualify as force majeure and entitle the contractor to relief under the contract.
b) Explain with appropriate specificity how the project is impacted, including references to specific materials delayed and activities affected. Contemporaneous documentation, such as photos, showing that the delayed material or work was on the critical path will make for a much more persuasive presentation.
c) Identify the potential impact in terms of time and money and the efforts the contractor is undertaking to mitigate those impacts. As more information becomes known, these notices should be updated.
Careful attention should be paid to contractual provisions regarding the contents and timing of claim submissions after the initial notices. Finally, it is important to realize this is a human issue that affects all of us in differing degrees. All parties should try to approach the issue with empathy and sincerity and be careful not to overreach.