|Amid the flurry of coverage regarding the Coronavirus, a recent article in the Financial Times caught my attention. The article stated that 3,325 companies had been issued certificates by the Chinese government authorizing them to void contracts worth $38.5 billion.
Similarly, the Indian Financial Ministry issued an office memorandum stating that disruption of supply chains due to Coronavirus in China or any country will be covered in the force majeure clause of contracts of companies forced to default on their contract obligations due to delays in shipments.
Force majeure clauses appear in all types of contracts around the world. While the language in these contracts differs, the general concept is that parties may be excused from performance in extreme circumstances beyond the control of the party such as Acts of God which include various forms of natural disasters, war, terrorism, strikes and other similar items. Some contracts may specifically include epidemics and/or failure to supply materials as force majeure events and others do not.
Regardless of how particular contracts are worded, the force majeure issue is going to come to the forefront as companies are unable to fulfill their obligations due to interruptions in the supply chain and other disruptive events. In those instances where parties cannot resolve their differences by negotiation, the courts will decide whether particular force majeure clauses should be read restrictively or expansively under these unique circumstances of a potential pandemic.
Turning to our real estate world: force majeure clauses in leases are generally drafted to protect landlords from liability (1) if they are unable to complete construction work for the tenant prior to its occupancy of the premises or (2) they cannot make the office available to the tenant due to an event out of the landlord’s control.
On the other hand, what happens to the tenant who cannot pay the rent due to a sudden downturn in business that is completely beyond their control? The traditional remedy is for the tenant to declare bankruptcy. Might tenants with creative counsel now try to invoke a common law concept of force majeure as an alternative remedy? Further, will the government consider supporting affected companies with financial assistance as it does when there is a flood or hurricane, or as it did after 9/11 and for farmers impacted by the Trump tariffs?
Another adverse impact on real estate from the virus could be supply chain delays experienced by builders working on projects using raw materials and supplies from China. And of course, there is the obvious danger that there is a recession or slowdown, lower employment will hurt the currently robust office leasing market and the less stable retail market.
On a more qualitative note, the current trend in office space has been moving fast toward open bullpen spaces with fewer and smaller private offices. Viruses thrive in areas of such close contact. As a result, there could be renewed appreciation for the more traditional office configuration with more private offices and less open space. But that is a subject for another article.
Hopefully, the Coronavirus crisis will be resolved soon, and these issues will not be faced by many businesses. However, if the siege truly comes to our shores, I would not be surprised if it bubbles up in contracts of all types and the courts are called upon to fashion remedies.
What do our clients and friends think? Please let us know.