Dealing with the Risk of Events of Force Majeure

What does and does not constitute an event of force majeure is often a hotly contested lease provision. For example, tenants may argue that unless the local governmental authority actually suspends (declares a moratorium) issuing building permits, a mere delay in issuance (predictable) should not constitute a force majeure event. A tenant is relying on the landlord/developer and its contractor's expertise to know about and build into the project schedules a slow governmental approval process.

Adverse weather conditions are sometimes included as a force majeure event, and their inclusion is often debated. It is fair to contend that absent a hurricane that is not customary in a certain region, a bad snowstorm or a few weeks of rain should not, in and of itself, be deemed a force majeure event. Contractors build into their schedule time for normal weather delays, so the landlord should be covered absent a major hurricane, etc. If adverse weather language is included, the party opposing this inclusion might request that such a delay be supported by climatological data covering the preceding five years that proves the weather in question exceeds the intensity or frequency for the five-year average.

Also, an event should not be deemed to be a force majeure if it was caused solely by the action or inaction of the person claiming the force majeure or his or her contractor, supplier, or affiliate. For example, if the landlord's architect specifies the use of a material that is not available, or its general contractor has a subcontractor or material supplier go out on strike, these events should not be deemed an event beyond the landlord's control. The landlord/developer is being hired and paid a fee to assume these risks and should have alternative solutions in place.

Why Does the Inclusion of Force Majeure Events in Leases Matter?

Force majeure clauses spark the most heated negotiations when the landlord requests that force majeure events be permitted to postpone the delivery of an office building. This is especially true when the tenant currently leases office space that it must vacate in a timely manner or be subject to damages (which may include consequential damages) and/or eviction for holding over.

Letters of intent rarely deal with the whole issue of construction delays due to force majeure events. Brokers believe force majeure is more of a 'legal' issue that is better addressed in the lease. In a recent deal, the letter of intent had provided for a date by which the landlord committed it would deliver the base building. There were no exclusions for force majeure. In the lease draft that the landlord's counsel prepared, delays in the delivery of the base building shell were permitted due to force majeure events that included an inability of the ownership to obtain financing due to acts of terror. With a tight project schedule and the risk that the tenant would have to pay double rent plus risk eviction should the tenant holdover, the deal died.

In instances where the tenant hires its own contractor to build-out the leasehold improvements, some tenant's counsel request an extension of time for delivery of the premises for force majeure events. For example, in one situation, the tenant insisted that the rent commencement date should not occur if its contractor were delayed due to an inability to timely obtain labor or materials. The landlord objected, as it could not agree to wait an unspecified time period to receive rent on the space. The parties agreed that an extension of time for events or conditions that were not in any way caused by the tenant, or within its control (or that of its contractors or agents), that would have delayed the landlord had the landlord been responsible for the leasehold improvements, would be deemed events of force majeure, and thus delay the rent commencement date. Such events might include a moratorium on either the issuance of building permits or approvals from the applicable governmental authority, loss of essential services to the space, fire or other casualty, or acts of God.

Protecting Against the Impact of Force Majeure Lease Language

The following sample provision seeks to protect the client from open-ended force majeure clauses:

Either party's inability to fulfill or delay in fulfilling any of its obligations (other than the payment of any monetary sum and maintenance of insurance) under this Lease expressly or impliedly to be performed by such party or such party's inability to make or delay in making any repairs, additions, alterations, improvements or decorations or such party's inability to supply or delay in supplying any equipment or fixtures shall be delayed, if such party's inability or delay is due to or arises by reason of strikes, labor troubles or by accident, or by any cause whatsoever beyond such party's reasonable control, including governmental preemption in connection with a national emergency, extraordinary governmental permitting and inspection delays (which shall include, for example, permitting delays arising from a moratorium on the issuance of permits and inspection delays arising from the death, removal or resignation of a governmental inspector who is not promptly replaced by the applicable governmental authority, but which shall not include, for example, ordinary permitting issuance and inspection delays), requirements or shortages, or unavailability of labor, fuel, steam, water, electricity or materials, or mechanical breakdown, acts of God, enemy action, civil commotion, fire or other casualty, or delays caused by any tenant other than Tenant.

It is good practice to provide in the lease that the party claiming an extension of time due to a force majeure event promptly notify the other party and use commercially reasonable efforts to minimize the delay caused by the force majeure event. In addition, force majeure events should never be valid claims for the delay of the tenant's obligation to pay rent, either party's insurance obligations, or the landlord's obligation to fund leasehold improvement dollars.

Most leases do not provide either party with a remedy due to a permissible delay in the other party's performance of a lease obligation. For example, many leases will provide that the landlord will not be liable, nor will the tenant be entitled to any claims, due to the landlord's inability to deliver the leased premises in a timely fashion if such delay was caused by an event of force majeure:

If Landlord is unable to deliver possession of the Premises to Tenant on the Commencement Date due to a Force Majeure Event, the Commencement Date shall be extended by the period of the delay caused by the Force Majeure Event. ' Notwithstanding the estimated Commencement Date, if for any reason Landlord cannot deliver possession of the Premises to Tenant on said date, Landlord shall not be subject to any liability therefore, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder; provided, however, in such a case, Tenant shall not be obligated to pay rent or perform any other obligation of Tenant under this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Tenant.

Actually, if the lease permits a delay in the landlord's delivery of the base building due to a force majeure event, the tenant should require compensation from the landlord for any holdover rent and other damages it may suffer due to such delays after a certain period of time. Moreover, if the project cannot be delivered within 180 days of the anticipated delivery date, the tenant should seek the right to terminate the lease. However, under these circumstances, the tenant needs to ensure that there is a sufficient notification period in place so that it can identify an alternative building at a reasonable cost.

On the other hand, if the lease permits a delay in the tenant's build-out of its space due to a force majeure event, then the landlord should consider capping the amount of time a tenant can garner without paying rent due to such force majeure event.

In the event that your client remains concerned with the risk it is assuming due to a delay in construction for a force majeure event, you might consider looking for ways to insure the risk. Recently, a client was concerned about the delay in delivery of a base building that might occur due to an event of force majeure, as that term was defined in the lease. Due to the unpredictable nature of the events, the vast array of possible events that might be encompassed by the lease language and the open-endedness of the lease obligation, most insurance carriers do not offer coverage. Lloyds of London, however, was willing to provide coverage, but it was not willing to assume 100% of the risk; it would only cover 80%. Therefore, to buy the coverage, the client had to pay for approximately 20% of the amount of coverage it was seeking to insure. Apparently this is typical.

Summary

In summary, both landlords and tenants are well served to ensure that they identify, negotiate, quantify, and mitigate any potential costs and other nonmonetary issues that may impact their respective budgets and schedules related to force majeure events so that there are no surprises during the construction or renovation of an office building and/or the leased space.

Elizabeth L. Cooper is senior vice president and counsel and Creighton Armstrong is vice president with The Staubach Company, in Washington, DC.

Force majeure clauses are used in leases to extend the date upon which a party's performance of an obligation is due. Often such obligations pertain to the delivery of the building and/or leased premises. This article explains and discusses sample force majeure clauses and suggests ways to protect the party not claiming a delay caused by an event of force majeure.

What Are Permissible Force Majeure Events?

A force majeure event is an event beyond the control of the landlord or tenant (as the case may be) that delays, interrupts, or prevents a party from acting. Such events generally include acts of God, war, insurrection or terrorism, governmental controls or regulations that limit essential services or delay the issuance of building permits or other construction approvals, fire or other casualty, and/or an inability to obtain materials or labor due to a strike or labor dispute. These are events that are both unforeseeable at the time the lease is negotiated and cannot be prevented.

What does and does not constitute an event of force majeure is often a hotly contested lease provision. For example, tenants may argue that unless the local governmental authority actually suspends (declares a moratorium) issuing building permits, a mere delay in issuance (predictable) should not constitute a force majeure event. A tenant is relying on the landlord/developer and its contractor's expertise to know about and build into the project schedules a slow governmental approval process.

Adverse weather conditions are sometimes included as a force majeure event, and their inclusion is often debated. It is fair to contend that absent a hurricane that is not customary in a certain region, a bad snowstorm or a few weeks of rain should not, in and of itself, be deemed a force majeure event. Contractors build into their schedule time for normal weather delays, so the landlord should be covered absent a major hurricane, etc. If adverse weather language is included, the party opposing this inclusion might request that such a delay be supported by climatological data covering the preceding five years that proves the weather in question exceeds the intensity or frequency for the five-year average.

Also, an event should not be deemed to be a force majeure if it was caused solely by the action or inaction of the person claiming the force majeure or his or her contractor, supplier, or affiliate. For example, if the landlord's architect specifies the use of a material that is not available, or its general contractor has a subcontractor or material supplier go out on strike, these events should not be deemed an event beyond the landlord's control. The landlord/developer is being hired and paid a fee to assume these risks and should have alternative solutions in place.

Why Does the Inclusion of Force Majeure Events in Leases Matter?

Force majeure clauses spark the most heated negotiations when the landlord requests that force majeure events be permitted to postpone the delivery of an office building. This is especially true when the tenant currently leases office space that it must vacate in a timely manner or be subject to damages (which may include consequential damages) and/or eviction for holding over.

Letters of intent rarely deal with the whole issue of construction delays due to force majeure events. Brokers believe force majeure is more of a 'legal' issue that is better addressed in the lease. In a recent deal, the letter of intent had provided for a date by which the landlord committed it would deliver the base building. There were no exclusions for force majeure. In the lease draft that the landlord's counsel prepared, delays in the delivery of the base building shell were permitted due to force majeure events that included an inability of the ownership to obtain financing due to acts of terror. With a tight project schedule and the risk that the tenant would have to pay double rent plus risk eviction should the tenant holdover, the deal died.

In instances where the tenant hires its own contractor to build-out the leasehold improvements, some tenant's counsel request an extension of time for delivery of the premises for force majeure events. For example, in one situation, the tenant insisted that the rent commencement date should not occur if its contractor were delayed due to an inability to timely obtain labor or materials. The landlord objected, as it could not agree to wait an unspecified time period to receive rent on the space. The parties agreed that an extension of time for events or conditions that were not in any way caused by the tenant, or within its control (or that of its contractors or agents), that would have delayed the landlord had the landlord been responsible for the leasehold improvements, would be deemed events of force majeure, and thus delay the rent commencement date. Such events might include a moratorium on either the issuance of building permits or approvals from the applicable governmental authority, loss of essential services to the space, fire or other casualty, or acts of God.

Protecting Against the Impact of Force Majeure Lease Language

The following sample provision seeks to protect the client from open-ended force majeure clauses:

Either party's inability to fulfill or delay in fulfilling any of its obligations (other than the payment of any monetary sum and maintenance of insurance) under this Lease expressly or impliedly to be performed by such party or such party's inability to make or delay in making any repairs, additions, alterations, improvements or decorations or such party's inability to supply or delay in supplying any equipment or fixtures shall be delayed, if such party's inability or delay is due to or arises by reason of strikes, labor troubles or by accident, or by any cause whatsoever beyond such party's reasonable control, including governmental preemption in connection with a national emergency, extraordinary governmental permitting and inspection delays (which shall include, for example, permitting delays arising from a moratorium on the issuance of permits and inspection delays arising from the death, removal or resignation of a governmental inspector who is not promptly replaced by the applicable governmental authority, but which shall not include, for example, ordinary permitting issuance and inspection delays), requirements or shortages, or unavailability of labor, fuel, steam, water, electricity or materials, or mechanical breakdown, acts of God, enemy action, civil commotion, fire or other casualty, or delays caused by any tenant other than Tenant.

It is good practice to provide in the lease that the party claiming an extension of time due to a force majeure event promptly notify the other party and use commercially reasonable efforts to minimize the delay caused by the force majeure event. In addition, force majeure events should never be valid claims for the delay of the tenant's obligation to pay rent, either party's insurance obligations, or the landlord's obligation to fund leasehold improvement dollars.

Most leases do not provide either party with a remedy due to a permissible delay in the other party's performance of a lease obligation. For example, many leases will provide that the landlord will not be liable, nor will the tenant be entitled to any claims, due to the landlord's inability to deliver the leased premises in a timely fashion if such delay was caused by an event of force majeure:

If Landlord is unable to deliver possession of the Premises to Tenant on the Commencement Date due to a Force Majeure Event, the Commencement Date shall be extended by the period of the delay caused by the Force Majeure Event. ' Notwithstanding the estimated Commencement Date, if for any reason Landlord cannot deliver possession of the Premises to Tenant on said date, Landlord shall not be subject to any liability therefore, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder; provided, however, in such a case, Tenant shall not be obligated to pay rent or perform any other obligation of Tenant under this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Tenant.

Actually, if the lease permits a delay in the landlord's delivery of the base building due to a force majeure event, the tenant should require compensation from the landlord for any holdover rent and other damages it may suffer due to such delays after a certain period of time. Moreover, if the project cannot be delivered within 180 days of the anticipated delivery date, the tenant should seek the right to terminate the lease. However, under these circumstances, the tenant needs to ensure that there is a sufficient notification period in place so that it can identify an alternative building at a reasonable cost.

On the other hand, if the lease permits a delay in the tenant's build-out of its space due to a force majeure event, then the landlord should consider capping the amount of time a tenant can garner without paying rent due to such force majeure event.

In the event that your client remains concerned with the risk it is assuming due to a delay in construction for a force majeure event, you might consider looking for ways to insure the risk. Recently, a client was concerned about the delay in delivery of a base building that might occur due to an event of force majeure, as that term was defined in the lease. Due to the unpredictable nature of the events, the vast array of possible events that might be encompassed by the lease language and the open-endedness of the lease obligation, most insurance carriers do not offer coverage. Lloyds of London, however, was willing to provide coverage, but it was not willing to assume 100% of the risk; it would only cover 80%. Therefore, to buy the coverage, the client had to pay for approximately 20% of the amount of coverage it was seeking to insure. Apparently this is typical.

Summary

In summary, both landlords and tenants are well served to ensure that they identify, negotiate, quantify, and mitigate any potential costs and other nonmonetary issues that may impact their respective budgets and schedules related to force majeure events so that there are no surprises during the construction or renovation of an office building and/or the leased space.

Elizabeth L. Cooper is senior vice president and counsel and Creighton Armstrong is vice president with The Staubach Company, in Washington, DC.