Recent news coverage has discussed buildings destroyed by wildfires in California. Properties in Hawaii have been threatened by earthquakes and volcanos, as well as mudslides following a tropical storm. And, we have seen the impact last year’s hurricanes and flooding caused to real estate in Texas and Puerto Rico.
Many real estate contracts address these types of issues by including a “force majeure clause.” A force majeure clause excuses the parties from the contract due to extraordinary circumstances outside of their control.
Force majeure clauses usually cover weather and environmental conditions considered to be “acts of god.” Acts of god hurricanes, floods, tornadoes, volcanic eruption, mudslides, and wildfires. Sometimes, this isn’t enough to meet the parties’ needs.
A force majeure clause might also include additional circumstances outside of the parties’ control, such as terrorism, epidemics, labor strikes or unionization, elimination of transportation options, fire or other casualty, shortage of raw materials, or major zoning or regulatory changes.
The items included in the force majeure clause should be customized depending on type of real estate involved. For instance, a senior housing property might be impacted by an epidemic more than an office building. Labor strikes, major building code changes, or shortage of raw materials would be more problematic for a real estate development contract than for the typical real estate purchase contract. Loss of mass transit would impact a hotel or retail property more than a warehouse or self-storage property.
Some force majeure clauses aren't triggered until an event causes a certain amount of impact . In the examples, the contract might say that an epidemic does not affect the senior housing contract unless there is a 25% occupancy reduction. Or the building code changes might not impact the development contract unless the total cost of the project increased by at least 10%.
Not having a force majeure clause can be costly. For instance, buyer might have to pay top dollar for real estate which has been destroyed. Or the buyer might have to buy property it cannot use for the intended purpose due to regulatory changes. Or a contractor might lose money on a real estate development project if labor or material costs increase unexpectedly.
It may seem like a waste of time and money to negotiate contract clause covering such unlikely events. Yet, when disaster strikes, parties which have included a customized force majeure clause can take comfort in having built-in contract protection that addresses their needs.