Impact of COVID-19 on Real Estate Laws- “A Global Study”

Impact of COVID-19 on Real Estate Laws- “A Global study”

The use of a “time is of the essence provision” is usual in real estate acquisition as well as sale agreements, specifying that the deadlines for performance in the contract are fundamental to the agreement and failure to comply by the agreed deadline would be a contractual breach. Nevertheless, it may also provide a force majeure clause enabling, in the case of an “act of God” or other occurrences outside the jurisdiction of the parties, in any case, temporary or permanent avoidance of some time of essence provision. In fact, certain loan agreements, real estate acquisition and sale arrangements that contain provisions for closure such as contingencies in the financing, contingencies in rent rolls or conditions for lease review, and can also be triggered by COVID-19 allied events. Although such provisions are often agreed on the basis of the facts of the particular transaction they should be examined to decide whether COVID-19 related incidents may prompt them.

  Material Adverse Event (MAE) Provision

MAE is also known as Material Adverse Change (MAC) provision, allows a party to refrain from the contract under conditions when a material alteration occurs after its signature. These provisions are typically included in acquisition as well as financing arrangements. The MAE provisions are generally included in the agreements; it’s very complex to categorize an incident as one which grounds a MAC. In the definition of the MAE provision the language and guidance is usually used to determine the materiality threshold to assess the detrimental impact of certain event on the intended business. What’s material, however, is otherwise left unspecified. What comprises an MAE is a matter to be answered by the competent court, invoking the MAE provision in case a dispute arises.

Whether or not COVID-19 should be called an MAE?

In the specific situation, the extent and long-term effect of the COVID-19 condition can be a critical aspect which can be interpreted by the courts to decide whether or not it should be called an MAE. If COVID-19 constitutes as an incident that will trigger MAE may rely on several variables such as the language of the MAE definition, the effect on the business of the particular target company vis-a-vis other related companies, the effect on the industry that the target company works in as aligned with other businesses or sectors. The language of the MAE definition explicitly prohibits force majeure incidents, epidemics, pandemics, natural hazards or else general effects on capital markets, economic conditions; it might be challenging to consider a MAC for COVID-19. The burden of proof must rest on the party using the MAE provision to establish that the pandemic had, or is likely to have, a substantial and adverse effect on the activity involved.

Force Majeure Provision

If a contract relating to real estate stipulates that the absence of a force majeure event is a condition for performance, the parties may indeed take into account whether the impact of COVID-19

pandemic comprises force majeure. Whether such incidents caused by the COVID-19 pandemic will constitute force majeure would primarily rely on the provision of force majeure (if any) contained in the agreement.

For illustration, prescribed force majeure provision may perhaps term a force majeure merely as an “act of god” or an “event outside the contracting parties’ control”. Such a provision would provide significant space for dispute among the parties on whether the COVID-19 or the company’s responses to it signify an “act of god”, or else constitute an incident of force majeure.

Conversely, a few provisions states very precise explanation of what succeeds as a force majeure, which may include “fire, flood, war or insurrection”. Except the word “epidemic” or alike words are incorporated, It may be complicated to incorporate the COVID-19 incidents into force majeure clause, except the government interventions contribute to incidents that fall under certain force majeure events mentioned, such as resource shortages, labour shortages or, possibly, civil disobedience.

Courts strictly interpret force majeure provisions, and would often recommend that the circumstances triggering the termination or suspension of the agreement fall firmly under one of the specified incidents. In conditions where a force majeure provision provides a “catch-all phrase”, additionally to specific situations, including “other events beyond the applicable party’s control”, Courts apply the principle of “ejusdem generis”, which states that “words constituting general language of excuse are not to be given the most expansive meaning possible, but are held to apply only to the same general kind or class as those specifically mentioned.”[1]

Business Day

There no universal meaning of business daysome agreements refer to days that are not weekends or else holidays; some agreement doesn’t contain a definition, and as a substitute depend on common practice. If there is a definition of “business day” in the contract, it should be analyzed to identify whether title company or else bank closures because of COVID-19 can be a basis for delays. If the agreement depends on common usage rather than explicitly specifying “business day” so, it’s conceivable that a court may find difficulty or failure in meeting another date due to business or government closure as justification for stretching performance in a next “business day” provision.

 Non-Contractual Common Law Principles that Excuse Performance

Yet in the non-existence of contractual force majeure or else MAEs provisions, may resort to defences common law of frustration of purpose, deterrence by government directive or impracticability, as probable alternatives to discharge their commitment under real estate allied agreements. All these defences are usually acknowledged at common law as well as are included into the Restatement (2d) of Contracts, which is followed in most jurisdictions.

[1] Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 943 (N.Y. App. Div. 2007); 

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