Real estate “clause du jour”

The Waldo Canyon and High Park fires, along with the ensuing flooding and mudslides, experienced by Coloradans this summer have many property owners, lenders, tenants and landlords seeking guidance on the interpretation of “force majeure” clauses in their purchase agreements, leases and mortgages.

 Historically seen as boilerplate contract language, a force majeure, or “greater force,” provision typically excuses the nonperformance or delayed performance of obligations under an agreement where an event occurs outside of the control of both parties, and the event could not have been reasonably foreseen or prevented.  The result of a force majeure event will render performance under the contract impossible (objectively speaking, “no one could do it”), impractical (where excessive costs prohibit the performance of a basic assumption of the contract), or illegal. 

Given the limited guidance provided by Colorado case law and statutory provisions on this topic, businesses, attorneys, and courts must carefully review a contract’s language to determine what specific events unique to the contract constitute force majeure.  An overview of the many types of force majeure events, illustrations of events that do not constitute force majeure, and drafting considerations for a force majeure clause will all serve as a springboard for attorney-client discussions of Colorado’s natural disasters and so much more.

Typical force majeure clauses excuse nonperformance or delayed performance when spontaneously occurring natural events referred to as an “Act of God” transpire—such as fires, floods, tornados, hurricanes, and earthquakes.  For example, if a house under contract to sell were to completely burn down prior to the closing date, it will be objectively impossible for the seller to deliver possession of the house or convey the house in a certain condition contemplated by the agreement.  As a result, a force majeure clause in the purchase agreement might excuse the seller from these performance obligations, as well as excuse the buyer’s obligations to purchase the charred piece of property.  Furthermore, the contract likely would also require all earnest monies be returned to the buyer.  While force majeure clauses often address this type of natural disaster, recent history has caused force majeure clauses also include the occurrence of regulatory, governmental, social, and economic events as well. 

Regulatory or governmental force majeure events occur when unforeseen revisions to the law or regulatory requirements become effective after the execution of an agreement.  These changes can arise from legal action, the enactment of any law, order, proclamation, regulation, or ordinance, or requirements, mistakes, or capricious acts of governmental agencies.  In particular, these types of force majeure events may materially affect one or more parties’ use of a property by rendering a specific use or the physical construction of the property illegal.

Finally, while courts have held that changes in market conditions are insufficient to trigger a standard force majeure clause, acts of war or terrorism, riots, insurrection, and the corresponding economic repercussions caused by these events are all examples of force majeure events faced by business owners from time to time in our recent history.   For example, the events of September 11th and the more recent “Occupy” movement have all caused excused nonperformance or delayed performance of contract obligations due to the effect these events have had on business transactions.  

With this overview of force majeure events in mind, a few examples of events that do not constitute force majeure further illustrate typical elements of a force majeure event.  First, the failure to obtain a liquor license for a bar or restaurant prior to the commencement date on a lease is not a force majeure event.  In this situation, one party controls the outcome of the process by bearing the responsibility to obtain the liquor license and thus, the requirement to obtain a liquor license is likely only a condition precedent to lease commencement.  Second, an increase of the cost of labor is not a force majeure when a shortage of labor in an area at a particular time resulted in increased wages.  Instead, these cost increases are examples of foreseeable changes in market conditions that do not likely rise to the historic or catastrophic level required of a force majeure event.  As a result, developers are required to anticipate supply challenges for labor, materials and equipment in their contract negotiations. 

A force majeure clause can be drafted by attorneys and their clients taking into consideration the specific obligations of the client under the contract and the relevant business industry’s susceptibility to certain disasters. For example, parties with the least amount of performance obligations will likely prefer a more general force majeure clause to limit the possibility of an excuse being claimed.  However, parties with the greatest performance obligations will prefer a laundry list of force majeure events that include non-traditional regulatory, governmental, social, and economic disasters. 

Attorneys can also protect their clients by drafting strict notice requirements, placing limits on the extensions of excusable conduct caused by force majeure events, and require due diligence to mitigate the damages caused by a force majeure event.   For example, a force majeure clause may require the party claiming a force majeure event to give written notice within twenty four hours after it knows of the occurrence of the force majeure event and describe in detail the cause and nature of the event, the anticipated delay, and all commercially reasonable efforts undertaken to mitigate the effect of the force majeure event and remedy the inability to perform.  A notice similar to this will assist both parties in the event of future litigation arising from the force majeure event and help to determine whether performance obligations may be excused altogether or simply delayed for a period of time equivalent to the delay caused by the force majeure event.

Change caused by today’s many types of disasters is inevitable, but thankfully with an experienced attorney, “an ounce of prevention is worth a pound of cure” in the review and drafting of a force majeure clause.