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What Is Force Majeure and How Is CRE Using It Right Now?

May 01, 2020 by Deidre Woollard

Force majeure is a clause in many real estate contracts that allows relief for one or both parties in the event of a major unexpected event. The term is a French phrase meaning superior force and is put in place to provide some sort of protection when the unforeseen arises. In some cases, these clauses can also be called material adverse event provisions, or MAE. Specifically, these clauses can allow tenants to break a lease or get out of other obligations. Some contracts specify the types of events that qualify, but many do not.

Why people are talking about force majeure now

This clause, usually buried deep in legalese, has become a topic of conversation in recent weeks as the impact of COVID-19 has had a variety of ripple effects throughout the commercial real estate world. Widespread stay-at-home orders have prompted retail stores and restaurants to close and many brands -- from Cheesecake Factory (NASDAQ: CAKE) to GAP (NYSE: GPS) -- to stop paying rent. Construction is also on pause in many markets, meaning that some companies that may have had loans contingent on meeting deadlines could be in trouble.

All of this is sending people to their contracts looking for potential relief. Force majeure clauses don't mean that either party is absolved from their obligations, but they can provide a framework for solutions. Some tenants are leaning on force majeure in order to stop paying rent, while landlords are wondering if it relieves them of obligations, such as keeping buildings open or maintaining common spaces. Other businesses are wondering if they can use force majeure to break leases and other contracts entirely.

Communicate before you litigate

One thing that we've continued to stress in all our COVID-19 coverage is that landlords and tenants need to be open and honest about issues with payments. The same is true with lenders and homeowners. This is even more important in the commercial real estate world where the stakes are higher. Conversations between all parties involved are crucial. This is an unprecedented situation and compromise may be necessary. Negotiation may become a critical tool over the next several months.

Look at your contract and see if you have a force majeure clause and if it specifies what types of circumstances it can be activated in. Some clauses will specify natural disasters, other emergencies, or the term acts of God. Others may use the term civil authority, referring to government shutdowns.

However, very few will specifically call out a pandemic, simply because a pandemic has never been this economically disruptive before. Force majeure clauses may also indicate what type of relief is available and how the parties should give notice that it will be used. These clauses are often open to interpretation, so your attorney may be able to offer more guidance on exactly how the policy can be used if litigation becomes necessary.

Potential solutions

Rent abatement can be an option for some tenants. Pausing rent can be a good stop-gap measure, but eventually, those bills will come due, and if companies haven't been able to make up for the losses incurred during stay-at-home orders, they may not be able to recover.

Many companies have also sought relief through loan programs created by the CARES Act. These programs can give tenants a cash infusion to help satisfy their obligations. This, too, is meant to be a temporary measure to get businesses back on their feet. Force majeure is likely to come into play in larger legal cases where parties are looking to completely get out of their contractual obligations.

David DiJulio, a real estate attorney with DiJulio Law Group in Glendale, California, told Millionacres that he hasn't heard of any COVID-19 related force majeure cases yet. He also points out that because there are no official opinions on COVID-19 cases yet, it's unclear how these will be litigated. Some judges and lawyers will look back to times when force majeure was invoked during other disasters or times of crisis in order to reach decisions on individual cases.

Remember, each use of the clause is different. If you have questions about the force majeure clause in your contract, your best bet is to reach out to your legal counsel.

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Deidre Woollard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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