As with virtually every profession, our firm’s real estate law practice will fundamentally change for the foreseeable future due to the COVID-19 pandemic. Even under a best-case scenario, with the shelter in place order being lifted and some sense of normalcy returning later this spring, it will not be business as usual for quite some time. A discussion of the legal term force majeure has been popping up with great frequency in recent days on LinkedIn posts and many law firm newsletters. This article will provide my insight on this subject, and other challenges facing commercial and residential transactions in 2020 and beyond.
Existing Commercial Leases
In order to justify or excuse contractual performance as a result of the COVID-19 pandemic, the lawyer for a struggling tenant should begin her analysis within the four corners of their lease agreement to identify a force majeure clause. A force majeure clause, a Latin term which translates to “superior force” (or often referred to as an “act of God”), is found in many commercial leases. It allows for contractual non-performance by one of the parties as a result of an identified extraordinary event outside the parties’ control- such as war, terrorism, fire or flood.
Whether or not a certain unforeseen event qualifies as force majeure depends heavily on the specific language of the lease contract. While typical commercial leases do not specifically reference infectious or pandemic diseases, if this unprecedented crisis continues, we can expect tenants to assert that the pandemic qualifies as unexpected act of God reasonably outside their control. In that instance, landlord’s counsel will inevitably assert that any tenant breach is unwarranted regardless of the pandemic, to the extent the building has remained open for business, and tenants are being provided with continuing security and operational utilities.
New Commercial Leases/Transactions
For those commercial leases or transactions currently being negotiated and not yet finalized, many are coming to a standstill or are otherwise terminating as a result of the pandemic. Even if a tenant’s business has not yet imploded, the tenant may still be hesitant to commit to a future lease commencement date. For those negotiations where both parties remain vested in finalizing a commercial lease, one strategy that we have utilized is drafting language postponing the commencement date until after a mutually agreed upon number of days following the end of the “shelter in place” order.
For commercial real estate transactions, our firm has similarly drafted contract riders allowing either party to delay the closing without being held in default. For those commercial transactions that were negotiated/finalized prior to the pandemic, but have not yet closed, the purchaser could be faced with an unfortunate predicament. The reason is that most commercial purchase and sale agreements do not contain a force majeure provision. To the extent the purchaser is in economic distress, and in the absence of “good will” from the seller, purchaser’s counsel will have to rely on common law legal theories in order to excuse non-performance. The common law defense known as “impossibility of performance” may support a contract termination where an unforeseen event occurs subsequent to the execution of the contract and where such unforeseen event makes it impossible for a party to perform.
Existing Residential Leases
Most residential leases, including the commonly used Chicago Association of Realtors lease form, do not contain a force majeure or a similar provision. But it is a virtual certainty that an overwhelming number of tenants will not timely pay rent in the coming months. When a residential tenant fails to timely pay rent, the landlord has the right to deliver a default notice requiring the tenant to cure or otherwise be subject to an eviction lawsuit. However, the governor has implemented an eviction moratorium and the Circuit Court of Cook County is closed until at least April 17, 2020. Similarly, the Cook County Sheriff will not be effectuating any evictions during this time. As such, we can expect a significant backlog in both the court’s case docket and sheriff’s eviction schedule when the courthouse doors open.
Existing/New Residential Transactions
The coronavirus pandemic is unfortunately coinciding with the all-important spring housing market. Many transactions that have come in the door in recent weeks have been terminated. However, we are pleased that several other buyers and sellers are completing attorney review and for the time being, are proceeding to closing. Most of these contracts are now subject to recently drafted “COVID-19 Riders” that control in the event of further delay from the pandemic. These riders allow the parties to delay the closing if necessary or otherwise terminate the contract if the pandemic worsens.
Mortgage lenders and title companies have been deemed essential services during the shelter in place order. Accordingly, real estate closings have still been proceeding in the Chicagoland area in recent weeks. Most title companies are doing an impressive job creating a safe environment and using best efforts to social distance while the buyer is at the closing. In fact, many Chicagoland title companies are now offering “drive-up” closings for its customers. Further, the Illinois Secretary of State announced this week that it is joining others states in allowing notaries to perform remote, online notarizations during the pandemic. However, getting to the closing table is posing its own set of unique challenges. Due to government office closures, sellers may be delayed in delivering title commitments, securing transfer stamps, paid water bills or zoning certifications. Purchasers, who may have previously waived their mortgage contingencies prior to COVID-19, may now be unable to receive a mortgage approval from their lender as a result of recent furlough or job loss.