As COVID-19 continues to spread and governments implement measures to protect public health and safety, the ability of counterparties in the real estate space to fulfill their contractual obligations has also been impacted.
One important contractual concept that may be implicated by COVID-19 is force majeure. In general, a force majeure clause exists in a contract to protect parties from being held to performance when an event outside of their control occurs and prevents their ability to perform. Under New York law, a force majeure clause must be expressly set forth in a contract and cannot be implied. Parties should first review their contracts and determine if they contain force majeure clauses. Whether a force majeure clause will be applied depends upon the language of the provision itself, and most courts will interpret such provisions narrowly.1 Force majeure clauses also do not typically protect against risks that are contemplated or obligations expressly assumed at the time of the contract.
If a force majeure provision specifically identifies the event that has prevented performance, courts will typically excuse a party’s performance.2 In Reade v. Stoneybrook Realty, LLC, for example, a landlord failed to deliver timely possession of the leased premises due to construction delays. The delays were caused, in part, by a temporary restraining order that prohibited construction on the premises for 40 days. The court found that the temporary restraining order was a “government prohibition” specified in the force majeure clause and that the landlord’s time to deliver possession of the premises was extended by the 40 days that the order was in effect.
If a force majeure clause contains catch-all language (such as “or other similar causes beyond the control of such party”) in addition to specified events, courts will generally only apply the clause to events that are the “same general kind or class” as the events specified in the contract.3 For example, in Kel Kim Corp. v. Central Markets, Inc., a lessee was required to maintain a liability insurance policy under its lease agreement. After the lessee’s insurer notified it that the insurer could not renew the policy due to uncertainty regarding the financial condition of its reinsurer, the lessee argued that the force majeure clause in the lease excused its inability to procure and maintain insurance. The court found that this was not a specified event in the force majeure clause and was not similar in kind or nature to the specified events in the clause, which pertained to the parties’ ability to conduct day-to-day commercial operations on the premises. As a result, the lessee’s performance was not excused.4
The defense of frustration of purpose may also be implicated by COVID-19. The defense exists to protect parties from being held to performance when an event occurs, by no fault of the parties, that significantly changes the nature of their contractual rights and obligations. Under New York law, the frustrated purpose must have been so completely the basis of the contract that the transaction would not have made sense without it.5 For example, where a party entered into a lease to use property as an office space and later discovered that the building’s certificate of occupancy only allowed for residential use, the court found that the tenant’s inability to lawfully use the premises as an office and the landlord’s alleged failure and refusal to correct the certificate of occupancy would, if proven, constitute a frustration of purpose entitling tenant to terminate the lease.6 Frustration of purpose is not available as a defense to performance when the event preventing performance was foreseeable and could have been addressed in the contract.7
It is difficult to generalize about the application of force majeure, frustration of purpose, and related doctrines since their applicability will depend on the exact language of the relevant provision and the facts and circumstances of each situation. In addition, the impact of mandatory government orders may also trigger excuse rights under existing contracts, which are also fact specific. Tenants, owners and operators of real estate should review their contracts to determine if there are any provisions that might provide them with relief.
If you should have any questions about these matters, please contact Rhona Kisch at 212-574-1510, Mark Brody at 212-574-1364, Adam Lesnick at 212-574-1393, Ian Silver at 212-574-1209, or your primary Seward & Kissel LLP attorney.
Seward & Kissel has established a COVID-19 Resource Center on our web site to access all relevant alerts that we distribute.
1 See Reade v. Stoneybrook Realty, LLC, 63 A.D.3d 433, 434 (1st Dep’t 2009).
2 Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902-903 (1987).
3 See id.
4 Id. The force majeure clause read as follows: “If either party to this Lease shall be delayed or prevented from the performance of any obligation through no fault of their own by reason of labor disputes, inability to procure materials, failure of utility service, restrictive governmental laws or regulations, riots, insurrection, war, adverse weather, Acts of God, or other similar causes beyond the control of such party, the performance of such obligation shall be excused for the period of the delay.”
5 See Warner v Kaplan, 71 A.D.3d 1, 6 (2009).
6 See Jack Kelly Partners LLC v Zegelstein, 140 A.D.3d 79, 81 (2016).
7 See Warner, 71 A.D.3d at 6.