FORCE MAJEURE, COVID-19, AND REAL ESTATE CONTRACTS

By April 9, 2020 Real Estate

Why are real estate contracts so long?  The initial REALTOR® Residential Resale Real Estate Purchase Contact was about one page – today, it is ten pages, not including the various addenda and disclosure forms.  Excellent contract drafting aims to memorialize the parties’ agreement, including their rights and responsibilities, and tries to anticipate future events to minimize uncertainty and avoid conflict.

Over the years, many have wondered whether a force majeure clause is really necessary.  “Force Majeure” is French for “superior strength” and is defined by Black’s law dictionary as the “contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.”  Force majeure clauses often contemplate events such as acts of God, hurricanes, earthquakes and other natural disasters, epidemics, quarantines, terrorism, government acts, embargos, labor strikes and lock-outs, and other events beyond the control of the parties.  Depending on how the contract is negotiated, the force majeure clause may excuse one or both parties’ performance obligations if one of the “superior force” events occurs.  

Today, due to the coronavirus COVID-19 pandemic, any force majeure clause in pending transactions is likely triggered. For example, the federal government and most local governments have declared the COVID-19 situation a “pandemic.”  Further, many states and cities have issued “stay-at-home” orders and issued edicts closing many businesses.

If the contract does not include a force majeure clause and is silent on the issue of what happens if an extreme event prevents one or both parties from performing under the contract, the contract will be governed by the common law doctrines of frustration of purpose or impracticability. 

These doctrines are similar but distinct. 7200 Scottsdale Road General Partners v. Kuhn Farm…, 184 Ariz. 341, 345, 909 P.2d 408, 412 (1995), citing Restatement (Second) of Contracts (“Restatement”) § 265 cmt. a (1981) (discussing the differences between impracticability of performance and frustration of purpose). Impracticability of performance is utilized when certain events occurring after a contract is made constitute an impediment to performance by either party. See Restatement § 261. Traditionally, the doctrine has been applied to three categories of supervening events: death or incapacity of a person necessary for performance, destruction of a specific thing necessary for performance, and prohibition or prevention by law. Id. cmt. a.

On the other hand, frustration of purpose deals with “the problem that arises when a change in circumstances makes one party’s performance virtually worthless to the other….” Restatement § 265 cmt. a. “Performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration.” Lloyd v. Murphy, 25 Cal.2d 48, 153 P.2d 47, 50 (1944).

While the impact on the party adversely affected is the same regardless of which doctrine is applied, frustration of purpose, unlike the doctrine of impracticability, involves no true failure of performance by either party. Notwithstanding, some cases speak of a contract as “frustrated” when performance has become impossible or impracticable.  See, e.g., Matheny v. Gila County, 147 Ariz. 359, 360, 710 P.2d 469, 470 (App.1985) (doctrine of commercial frustration is not necessarily limited to strict impossibility). This usage is inaccurate. “[F]rustration is not a form of impossibility even under the modern definition of that term, which includes not only cases of physical impossibility but also cases of extreme impracticability of performance.” Lloyd, 153 P.2d at 50; see also Arthur Anderson, Frustration of Contract—A Rejected Doctrine, 3 DePaul L.Rev. 1, 3–4 (1953) (“[T]he concepts of frustration of purpose and impossibility or impracticability of performance are mutually in opposition.”).

Due to the current novel coronavirus or COVID-19 pandemic, both of the above doctrines are potentially triggered in pending real estate contracts and may excuse one or both parties’ performance obligations (assuming the contract does not include a force majeure clause; if the contract does include a force majeure clause, the parties rights and obligations should be clear).  If no force majeure clause exists, the parties’ obligations are less clear and will be determined by the court and common law if the parties are unable to negotiate a solution to the impasse.

If you or anyone you know have questions concerning real estate contracts, contact Mr. Charles At Provident Law.  Our real estate attorneys represent parties on either side of real estate and financing transactions, including buyers, sellers, landlords, tenants, lenders, borrowers, trustees, guarantors, shareholders, partners, and others. We advise, structure, negotiate, and document a variety of real estate and financing transactions, including leases, purchase and sale agreements, financing agreements, and development agreements for a variety of commercial and residential projects. Contact us today and learn how we can help.

Christopher J. Charles is the founder and Managing Partner of Provident Law®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”).  Mr. Charles holds the AV® Preeminent Rating by the Martindale-Hubbell Peer Review Ratings system which connotes the highest possible rating in both legal ability and ethical standards. He serves as an Arbitrator and Mediator for the AAR regarding real estate disputes; and he served on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions.

Christopher is a licensed Real Estate Instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. He can be reached at Chris@ProvidentLawyers.com or at 480-388-3343.