Real Estate Alphabet Soup: M is for Force Majeure

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In my last post, “Real Estate Alphabet Soup: L is for Lease I continued my primer on the “alphabet soup” of real estate. This post continues to stir the “alphabet soup” with the letter “M.”

As I write this blog, we are in the midst of the COVID-19 coronavirus pandemic. So I’m working remotely from home and “social distancing” to do my part and civic duty in helping to “flatten the curve” and slow the spread of the virus.

When I first thought of my topic for this blog, my original thought was that M is for “Mortgage.” And it is, of course. In brief, a “mortgage” is the conveyance of an interest in real estate from a borrower to a lender as security for the repayment of a loan. The mortgage is documented in writing and recorded in the land records of the county in which the property is located, creating a lien on the property. Upon repayment in full of the debt secured by the mortgage, the lender records a release or certificate of satisfaction in the land records to release the lien on the property.

As I finally sit down to write this blog; however, my thoughts are consumed by COVID-19 and all of the ways in which the coronavirus is also having an impact on real estate. So instead, taking a bit of artistic license and liberty, M is for “Force Majeure.” A French term, “force majeure” means literally, “force,” being strength or might, and “majeure,” or major. An “overpowering circumstance” according to Larousse’s French-English Dictionary.

Webster’s Ninth New Collegiate Dictionary defines “force majeure” as “(i) superior or irresistible force; (ii) an event or effect that cannot be reasonably anticipated or controlled.”

Many real estate leases and contracts contain a “force majeure” clause. The “force majeure” clause allows for certain lease or contractual obligations to be excused upon or during the occurrence of particular events.

In light of the COVID-19 pandemic, many commercial lessees are looking to the “force majeure” clauses in their leases in order to claim that the coronavirus and the resulting orders mandating closures of “non-essential” businesses falls under the protection of the “force majeure” provisions of the lease. Lessees may assert, therefore, that they should not be obligated to perform under the lease, including the payment of rent.

This is likely to become a subject of much debate and litigation. First, does the applicable “force majeure” clause (if there is one) excuse performance by lessor or lessee, or both? Second, even if the applicable “force majeure” clause excuses performance by a lessee, does it excuse payment of rent? Finally, most “force majeure” provisions likely do not specifically mention pandemics. Certainly the coronavirus pandemic is “an event or effect” that could not “be reasonably anticipated or controlled.” However, the specific language of the applicable “force majeure” clause will govern. Assuming the “force majeure” provisions are found to apply to the coronavirus, even though some would argue that certain operational aspects under a lease may be covered by the “force majeure” provisions, it is unlikely that the obligation for the payment of rent would be covered under the “force majeure” provisions. (Lessees may also look to any business interruption insurance policies they may have; however, the applicability of those provisions are also the subject of debate and likely litigation.)

So while there should be no doubt or debate that COVID-19 has been “an event or effect” that could not have been “reasonably anticipated or controlled,” lessors and lessees should expect that that there will be litigation arguing the applicability of “force majeure” clauses invoked by lessees suffering economic damage as a result of the coronavirus. An “overpowering circumstance” for certain.

In my next post, I will move on to the letter “N”, the next letter in this real estate “alphabet soup.”

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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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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