Contracting In The Age Of Coronavirus And Force Majeure: A Roadmap To Resolution
Since the COVID-19 situation has developed, our office has fielded questions from real estate agents, business owners, brokers, and clients as to how the pandemic will affect certain contractual rights and obligations. Force Majeure is a concept in contractual law which allows for the non-performance of certain contractual obligations. Specifically, force majeure enables a party to suspend or terminate their contractual obligations. Generally, force majeure provisions fall into one of two categories: (1) common law force majeure, and (2) contractual force majeure. Each is discussed in more depth, below.
Common Law Force Majeure
Under precedential authority set forth by Florida Courts, a party will be excused from performance under a contract when an Act of God renders the ability to perform a contractual obligation impossible. An “Act of God” is one that is so extraordinary and unusual that human foresight could not have adequately predicted its occurrence. See, Seaboard Air Line Ry. Co. v. Mullin 70 So. 467 (Fla. 1915). Typically, under a common law theory, performance must be impossible. That said, the common law theory of force majeure is strict in its application. The very performance of the contractual obligation must be impossible—such as destruction of a home by Tornado which is the subject of a valid contract for sale. Coronavirus is difficult to fit in the common law scheme as most contracts are not made impossible to perform because of it, with exception. Specifically, a party would not be excused from contractual obligations arising under any type of purchase contract simply because that party lost their job. It would make it difficult for the party to perform, but not impossible. An obligation under a contract is not terminated solely because it became burdensome for one party to perform. On the other hand, a restaurant which faces government-mandated closures, which is unable to fulfill a catering order because of the closure, would be excused from performance because it is impossible for the business to operate given the governmental regulation. Similarly, if a title company were to close, for example, a buyer or seller may be excused from certain performances because the Buyer’s funds are held in the account of the closed title company. As such, common law force majeure is dependent upon the facts and circumstances attending each case and depends upon impossibility of performance.
Contractual Force Majeure
Some contracts, in their own language, contains provisions relating to force majeure and acts of god. In this instance, the contractual terms itself can expand upon the common law requirement of impossibility. In that instance, the terms of the contract control, and supplement the common law force majeure.
Florida Real Estate Contracts and Force Majeure:
The FR/BAR “AS IS” (“Contract”) contains a force majeure provisions which provides as follows:
This Section contains various items of note:
- Any Obligation under the Contract can be suspended so long as the performance of the obligation is delayed or disrupted by an “Act of God.” Coronavirus would likely be considered an Act of God insofar as it prevents performances under contracts. There must be an actual disruption, a hypothetical disruption will not suffice. For example, the title company closes, or banks close.
- You must use reasonable diligent efforts to find comparable services or to perform the obligation. For example, if one insurer stops writing homeowner’s insurance policies, a Buyer must make reasonably diligent efforts to find another who will right. What exactly constitutes reasonable is a matter open to interpretation. If all homeowner’s insurance companies in the United States close, but one underwriter in London is willing to issue an insurance policy, it would not be reasonable to require a person to track down that single insurer. Thus, the buyer would likely be excused from performance.
to obtain approvals or services essential to closing can suspend
obligations under the contract. But what is essential? Essential to Closing
would typically tend to mean that closing cannot occur without it. For example:
- A Homeowner’s Association Estoppel
- A Payoff from a Lender
- A Payoff from a Judgment Creditor
- Wires or other funds transfer ability from Banks
- The availability of the Closing Agent.
- Funding Approvals from Banks
Q: WHAT HAPPENS IF THERE IS A DELAY OR DISRUPTION SUBJECT TO THE FORCE MAJEURE PROVISION?
A: The deadline for performance will be extended a reasonable time up to seven (7) days after the Force Majeure no longer prevents performance, but in no event more than thirty (30) days after the Closing Date—at which point either party can cancel, and the buyer would be entitled to a return of the deposit.
Q: DOES FORCE MAJEURE ALLOW FOR THE INSPECTION TO BE DELAYED?
A. Force Majeure is governed by Standard G of the Contract. Force Majeure means: hurricanes, floods, extreme weather, or other acts of God…which by exercise of reasonable, diligent effort, the nonperforming party is unable in whole or in part to prevent or overcome. If it’s determined that Force Majeure applies, the Parties shall not be required to perform any obligation under the Contract so long as performance or non-performance or the availability of services or required approvals essential to Closing cannot reasonably or diligently be procured. Under this standard, the Closing Date will be extended a reasonable time up to seven (7) days, after the Force Majeure no longer prevents performance. So, for example, a lack of power to the Property which would enable an inspection, would likely prevent performance under the Contract and would likely constitute a Force Majeure.
Q: WHAT IF THE BUYER REQUESTS TO EXTEND THE INSPECTION PERIOD UNDER FORCE MAJEURE?
A. If the services necessary to perform the inspection are able to be procured by the Buyer through reasonable, diligent efforts, (i.e. inspector), there would not be any delay or extension of the Inspection Period; if a Buyer states that his/her inspector is suspending business, this is not force majeure, as the Buyer could find another inspector.
Q. WHAT IF A LENDER REFUSES TO CLOSE AFTER ISSUING A LOAN APPROVAL?
A. If a Lender flat out refuses to close any loans for which approvals have been previously granted, and shuts down its lending operations, force majeure would not kick in. The flat-out refusal of a lender to close a loan transaction would not constitute a “delay or disruption” of services essential for closing. However, if a Lender, rather than canceling files, simply says they are suspending lending operations for a set period of time, then force majeure may be triggered to delay closing. Given the ambiguity in the wording of Standard G on the FR/BAR Contract, the failure to obtain financing might be subject to multiple, varying interpretations insofar as standard G is concerned. This requires a case-by-case analysis of the facts applicable to each case.