COVID-19 checklist for real estate and construction projects

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Eversheds Sutherland (US) LLPWith each passing day, the number of COVID-19 cases continues to rise and jurisdictions across the world are working hard to contain the contagion. People are rightly concerned about the impact that COVID-19 will have on their welfare, but there is also palpable concern about COVID-19’s impacts upon the businesses that people have worked hard to establish.

As we write this today, it would be foolhardy for any of us to speculate on the true impact of COVID-19. However, we do know that COVID-19 has already spawned supply chain disruptions in certain industries, and large groups of people now find themselves under government-sanctioned quarantines or face other restrictions on travel and commerce.1 Currently, these effects have been most felt abroad—first in China, South Korea, Iran and Italy—but the virus has had ripple effects through the global economy. Over the last several days, many other countries—and many US states—have imposed further restrictions. The situation will get worse before it gets better. China is the United States’ largest supplier of imported goods and supplies, including many of the building and interior design products that are used in developments around the country, like quartz, granite, marble, equipment and lighting fixtures.There are increasing reports of Chinese suppliers invoking Force Majeure provisions in their contracts to excuse performance or defend against breach of contract claims for failure to timely deliver the contracted goods.3

As COVID-19 spreads across the globe, including here at home in the United States, we expect to see similar supply chain disruptions and governmental actions impacting the supply of labor, goods and materials used in construction projects. As a result, we think this is an appropriate time for all parties involved in the construction or development industry to assess their risks of supply chain disruptions, labor shortages and governmental restrictions on their projects currently or soon-to-be under construction. One important part of that analysis to consider is the impact of possible Force Majeure claims resulting from delays or increased costs caused by COVID-19.

To aid in your preparation to meet the possible challenges presented by any delays or cost increases as a result of COVID-19, we’ve highlighted below some considerations and action items for your construction and development team.

A Force Majeure Checklist for Construction Projects in light of COVID-19

  1. Set up a monitoring system to keep track of COVID-19 outbreaks in your project areas and closely watch any associated supply chain disruptions, labor impacts, or governmental actions such as quarantines or travel restrictions
  2. Review all of your contracts for Force Majeure provisions
  • Pay close attention to any specific listings of events constituting Force Majeure
  • Pay close attention to timing of any required notices of Force Majeure events
  • Understand the effects and limitations of a Force Majeure provision (e.g., extensions of time, exclusions of costs, caps on delays)
  1. Check your insurance to see whether you carry business interruption or another insurance product that could mitigate damages in the event of a construction delay or COVID-19 related shutdown of your project (but be aware that many insurance products may require a physical loss to trigger coverage)
  2. Keep detailed records of construction progress and any delays or increased costs
  3. Reassess and closely monitor your construction budget, including the availability of any costs savings or contingency
  4. Reassess your construction schedule in light of current and anticipated conditions
  5. Review all construction, development and financing documents to determine the parties’ respective payment obligations for cost increases or delays related to Force Majeure events
  6. If you anticipate delays or other impacts to your construction project, plan ahead and prepare to sit down with your development partners and financiers in the project to discuss ways to address them

Background

Force Majeure is a contractual concept that derives from a French legal term of art that roughly translates to “superior force,” and it generally refers to an event or effect that cannot be anticipated or controlled. Contracting parties typically negotiate the scope of Force Majeure clauses to determine when a party will be excused of their performance, whether deadlines will be extended, and how the parties will allocate increased costs resulting from Force Majeure events. Force Majeure clauses are fairly common in commercial development and construction contracts, including joint venture and financing documents.

Typically, Force Majeure is defined in contracts by listing out specific events or examples that constitute Force Majeure. Some contracts may actually list out events like epidemics, pandemics or infectious diseases. Going forward, we expect most Force Majeure definitions will include these specific examples. The list of specific examples in the definition of Force Majeure is sometimes followed by a general or catch-all phrase such as “other events beyond the reasonable control of the parties.” Every contract is different and determining the scope of a Force Majeure definition is a critical first step to determining whether a party has the right to seek Force Majeure protections under the contract.

The actual definition of Force Majeure in a contract is important because the relief available to a party under a Force Majeure provision depends in large part upon the precise wording of the provision. Force Majeure definitions also commonly exclude certain events. For example, it is common for Force Majeure definitions to exclude general economic conditions or general market fluctuations.

Another important consideration is the actual language of the catch-all phrase in the definition of Force Majeure. It is generally more difficult for a party to claim Force Majeure by invoking a “catch-all phrase” in a contract and some courts require a special showing to win those claims. For example, a party seeking to invoke the general “catch-all phrase” might also have to prove that the event was unforeseeable.

As a general matter, the party seeking excuse from performance under a contract has the burden to prove that the Force Majeure clause should be invoked. This means that if you are the party invoking Force Majeure, you will need to prove that your inability to perform is actually caused by the COVID-19 outbreak or some related event. Without adequate details and supporting documentation, this could be difficult to establish. This is why it is critical to timely document any possible Force Majeure event and related impacts to your construction project.

Finally, it is important to familiarize yourself with the consequences of a party’s Force Majeure rights under your contracts. The most common effect or implication of invoking a Force Majeure provision is to excuse a party’s performance for the duration of the Force Majeure event and to extend contractual deadlines by the duration of the Force Majeure event. Often, however, certain construction financing and joint venture development agreements can limit the amount of time that a party can benefit from Force Majeure delays. For example, a party may not be able to extend construction or performance deadlines beyond 90 days, even if there was a valid Force Majeure event. In the context of joint ventures and construction guaranties, a developer or contractor may also have negotiated monetary relief for certain Force Majeure events. As a result, Force Majeure related cost increases for the project may be split between the developer and its passive investors.

In nearly all commercial real estate construction projects, the timing of completion is critical. But for some particular subsets of the industry, the consequences of missing a completion deadline can be much more problematic. Think of a student housing project under construction that fails to deliver available units before the start of school, or a sports and entertainment facility under development that cannot open for the new season, or a shopping center or other retail development that fails to deliver premises to retail tenants before a pivotal shopping season or during a blackout period. A missed completion deadline can have significant and long-lasting financial implications on such projects.

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1 Pierre Haren and David Simchi-Levi, How Coronavirus Could Impact the Global Supply Chain by Mid-March, OPERATIONS MANAGEMENT, Harvard Business Review (Feb. 28, 2020), https://hbr.org/2020/02/how-coronavirus-could-impact-the-global-supply-chain-by-mid-march?ab=hero-subleft-1. See also, Proclamation—Suspension of Entry as Immigrants and Nonimmigrants of Certain Additional Persons Who Pose a Risk of Transmitting 2019 Novel Coronavirus, PROCLAMATIONS, WHITE HOUSE (Mar. 11, 2020) https://www.whitehouse.gov/presidential-actions/proclamation-suspension-entry-immigrants-nonimmigrants-certain-additional-persons-pose-risk-transmitting-2019-novel-coronavirus/.
2 Office of the United States Trade Representative. Countries & Regions, China, Mongolia & Taiwan, The People’s Republic of China. https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china.
3 Huileng Tan, China invokes ‘force majeure’ to protect businesses — but the companies may be in for a ‘rude awakening’, WORLD ECONOMY, CNBC (last updated Mar. 6, 2020) (According to the China Council for the Promotion of International Trade, China has issued 4,811 force majeure certificates as of Mar. 3 due to the epidemic, state media Xinhua reported. Those contracts were worth 373.7 billion Chinese yuan ($53.79 billion), according to the report. See also, Coronavirus - Impact on International Trade & overview of unilateral protectionist measures, CORONAVIRUS LEGAL UPDATES, EVERSHEDS SUTHERLAND, https://www.eversheds-sutherland.com/global/en/what/articles/index.page?ArticleID=en/Competition_EU_and_Regulatory/coronoavirus-impact-on-international-trade.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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