A Good Clause
Examine force majeure language to protect from natural and human disasters.
almost daily reports of either blizzards in the Midwest, tornadoes in the
mid-Atlantic states, fires in California, or
hurricanes in Florida,
it's no surprise that the once-benign and sometimes ignored clauses addressing
"acts of God" are now front and center as parties negotiate the
purchase or lease of real estate.
of God refer to any natural event, such as a flood or storm, associated with a
force of nature over which no person has any control. Consequently, no one can
be held accountable for the consequences.
recent years the application has been expanded to include not only natural
disasters but also human-caused catastrophic events that significantly impact
transactions. In many legal circles, the preferred term is force majeure, a
French phrase that translates to "superior force," and covers both
natural and human disasters. Because case law is murky and varies from state to
state, the wisest choice is to use the broadest term that refers to all such
events regardless of causation.
tenants, and real estate buyers and sellers would be well-advised to pay
particular attention to this clause. Natural disasters such as Hurricane
Katrina and human-caused devastation such as the terrorist attack of Sept. 11,
2001, stand out as events that have strongly affected the day-to-day
transacting of commercial real estate deals. Other occurrences such as the anthrax
contamination of a South Florida building
several years ago illustrate the potential for disaster that can affect any
not a new issue, force majeure often is the last issue to be considered in a
contract's boilerplate language. Today, however, with the threat of terrorism
and the prevalence of natural disasters, all parties involved with a real
estate transaction should take the time to examine the consequences of the
clause contained in the contract.
are many boilerplate versions of the force majeure clause. They range from very
narrow to broad, all with the purpose of excusing parties from performing their
obligations due to a catastrophic event. Such clauses can cover only natural
disasters, but they should be written to include such events as disruptions in
telephone service, blackouts, riots, acts of terrorism, strikes, and
national-level software glitches.
are numerous ramifications once a disaster occurs, and a well-thought-out force
majeure clause will cover these circumstances. Below are some of the most
If an owner wants to sell a commercial property that has been damaged by a
storm or other natural disaster, the force majeure clause may come into effect
when the buyer's lender appraises the property. If the clause does not hold the
insurance company - or seller - liable for complete and total renovations, the
bank may not appraise - and thus not finance - the asset at its proper value.
matter should be settled during the inspection period, since banks will not
close without the appropriate certificates of insurance, and even minor damage
can keep a bank from funding at closing.
Insurance has an important interplay with the force majeure clause. In leases,
landlords can include a clause making it obligatory for the tenant to have
insurance, including business interruption insurance, which would decrease any
claim that a tenant might have in the event of damage to the space. Moreover,
by obtaining appropriate insurance the landlord can decrease his own exposure.
the purchase/sale arena, if a natural disaster occurs after the buyer has put
down his deposit but before the closing, the insurance company can revoke its
promise to supply the buyer with insurance following the disaster. This may
result not only in the cancellation of the sale, but the forfeiture of the
deposit by the buyer.
Uses. If the asset is substantially destroyed before the closing but after the
buyer's deposit is at risk, the buyer may be faced with reconstruction issues.
Zoning laws may require more parking than the building had for the original
number of units; other laws may require more expensive materials, such as
hurricane-grade windows or different concrete and wiring, that hike construction
costs. The buyer could be forced to close and even take the seller's insurance.
should first determine if the property they are purchasing is conforming or
non-conforming. If it is non-conforming, a buyer would certainly not want a
clause that enforces closing on the property and assignment of all insurance
money. Even with all insurance money, the buyer may not be able to rebuild to
the new standard required.
communities use their zoning codes to purposely limit an owner's ability to
rebuild a structure if it has been damaged or destroyed. It is very possible
that a buyer, even with adequate insurance coverage, cannot rebuild a
particular property in the same configuration that it existed. While
communities such as New Orleans and Fort Lauderdale, Fla.,
are addressing these issues in their codes, it is still a legal labyrinth.
its placement in the boilerplate section of contracts, drafting force majeure
language differs depending on the situation.
Seller's Clause. Property owners who are selling want the most options possible
with an excuse for non-performance. In purchase and sale agreements, the seller
wants to keep control of the situation and have the option to excuse
performance or sell the property with an assignment of insurance but not have
to undertake repairs.
Buyer's Clause. From a buyer's perspective, the very best clause forces the
seller to sell only after making repairs. This excuses the buyer from paying
for the property for some lengthy period of time while the seller rebuilds, and
the buyer would receive all the benefit of a newly rebuilt property without any
increase in purchase price. The seller would have to endure the permitting
period and the expense and cost of rebuilding, sometimes to a higher standard
because of the application of new construction requirements.
a buyer is unable to obtain a clause allowing for sale with complete repair, he
must make some decisions about the risk associated with the transaction. It has
become customary to have longer due diligence periods during which an
investigation of the property is conducted. It also is typical that as soon as
the due diligence period is over, the buyer is locked in. If the buyer is
unable to obtain a favorable force majeure clause, he must now understand his
exposure between the end of the due diligence period and the actual closing
final item to consider is that in today's electronic age face-to-face closings
are the exception. Consequently, businesses require adequate communications
that must be addressed in the force majeure clause. For example, if there is an
earthquake in San Francisco, it is highly
unlikely that a buyer can complete a wire transfer to Buffalo,
N.Y., to purchase property in Tampa, Fla.
However, a snowstorm in Buffalo or a hurricane
in Tampa also
could interrupt the transaction. Electronic funds transfer, electronic
execution, and electronic filing present new challenges, and traditional
clauses often do not take these matters into account.
the last few years, there clearly has been increased awareness about force
majeure clauses. This once-boilerplate clause is now a major issue in
consummating real estate transactions.