Alternatives to Force Majeure

Force majeure is a clause included in most contracts that relieves a party of its obligation under extreme circumstances - usually unforeseen and unpredictable events that make performing those obligations nearly impossible.  Examples would be war, strike, riots, crime, epidemic (pandemic) or other “ Acts of God” that prevent one or both of the parties to the contract from performing under the contract.

With business around the world disrupted due to the ongoing COVID-19 pandemic, the spotlight is on force majeure. In particular, the real estate industry has taken notice.

However, its impact on the industry is limited, especially regarding rent payment. The industry has begun to include more detailed provisions in contracts to provide support in future cases.

However, There are alternatives to force majeure available to those who are seeking relief now: frustration of purpose, conditions precedent, impracticability & impossibility.

Frustration of Purpose

Frustration of purpose is a part of common law that provides relief when the value that would be provided in a contract becomes significantly reduced or even nil because of unforeseen events.

This part of common law dates back to the Prohibition era. Bar owners signed leases expecting to run a bar, but Prohibition upended, and the contract no longer had value.

The bar for such relief is set fairly high. For example, in 1966 in Kennedy v. Reece, a California court determined that a defendant was obliged to finish drilling a 400-foot hole despite hitting rocks about halfway down.

Although the option is available, courts are reluctant to grant relief except under the most extreme circumstance.

Conditions Precedent

Conditions precedent are a part of contracts that lay out specific conditions that must first be met for a deal to go through. Because transactions often take a while to close, it is important to be mindful of these conditions and careful attention must be paid that these conditions are being fulfilled.

Traditionally, conditions have been minimal and not particularly significant. Now, conditions are becoming more important to contracts, especially in regard to occupancy and the ability to use the property as intended.

When a party gains interest in a particular restaurant or office location, they do so because of the anticipated current occupancy levels. They can expect to have “X” number of occupants each month.

However, COVID has shown us just how quickly those numbers can drop. Including a condition for occupancy level or the ability to continuously use the property can protect you from closing a deal that has significantly decreased in value.

As long as the conditions are clearly stated and agreed upon in the contract, courts will almost always grant relief.

Impracticability & Impossibility

Two additional common law doctrines include impracticability and impossibility. Both are similar to frustration of purpose, providing relief when major events impact performance.

Impossibility provides relief when the performance of a contract becomes objectively impossible. For example, a fire or extreme weather destroys a factory. It is no longer possible for that company to fulfill its contracts.

Impracticality can be viewed as “one step” below impossibility. Relief is thus granted when the fulfillment of the contract becomes nearly impossible, or so sufficiently burdensome or expensive that it is economically not feasible to continue operations.

In either case, the conditions must truly be extreme. Courts are reluctant to set a low precedent and provide relief to too many contracts.

For further information on real estate contracts, get in touch with a real estate attorney at Lee Scott Perres, P.C.