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Webinar Playback | Tri-Valley Commercial Real Estate Update: Impacts of COVID-19

Thank you to everyone who joined us for our Tri-Valley Commercial Real Estate Update: Impacts of COVID-19 webinar.

Please find the recording of the webinar below.

We hope you found the discussion helpful. Please do not hesitate to reach out to our advisors below if you need more guidance.

Our Trusted Tri-Valley Advisors

Speaker

Catharine B. Baker

Hoge Fenton

Special Counsel

+1.925.224.7780

email here

Speaker

Sblend Sblendorio

Hoge Fenton

Real Estate Attorney

+1.925.460.3365

email here

Speaker

Michael Copeland

Cushman & Wakefield

Managing Director

+1.925.621.3855

email here

Speaker

Donald Marek

Fremont Bank

Senior Vice President

+1.925.417.7671

email here

Moderator

Steven Kahn

Hoge Fenton

Real Estate Attorney

+1.925.460.3362

email here


This information is provided as an educational service by Hoge Fenton for clients and friends of the firm. This communique is an overview only, and should not be construed as legal advice or advice to take any specific action. Please be sure to consult a knowledgeable professional with assistance with your particular legal issue. © 2020 Hoge Fenton


Force Majeure in the Wake of the COVID-19 Pandemic

Businesses across the spectrum are suddenly and severely impacted by the COVID-19 pandemic. Forced to make difficult decisions about whether and how to continue their operations, many are asking: How can I get out of this contract? How can I avoid paying rent while I am forced to limit the operations of my business?

Many business owners and commercial tenants are hearing about a funky, unfamiliar legal term: “force majeure.” Contracts may contain force majeure clauses, but what do they really mean? Further, in the absence of a force majeure clause, California law excuses contract performance in certain extreme, unpredictable circumstances. Both situations are discussed in this article.

Scenario 1: The Contract Contains a Force Majeure Clause

A force majeure clause is a contract provision that excuses a party from performing one or more of its obligations under the contract in the event that an unforeseeable event or circumstances beyond the party’s control arise, making such party’s performance under the contract impossible, inadvisable, commercially impracticable, or illegal.

These circumstances are identified in the contract as “force majeure events” – meaning if they occur and impact performance under the contract, and are beyond the reasonable control of the impacted party, performance is excused. It is critical to carefully review the “force majeure” events identified in the contract.

Common force majeure events include, but are not limited to: natural disasters (such as earthquakes, hurricanes, and fires), epidemics and pandemics, terrorist acts, war, government action, and even union activities such as strikes.

For example, a buyer, located the San Francisco Bay Area, wishes to purchase a commercial real estate building. This buyer must wire her purchase price to an escrow agent located out of state. The day before buyer is set to wire her funds, a major earthquake hits the Bay Area. The buyer is now unable to complete her wire transfer in time, by no fault of her own. As such, because of the force majeure clause in the purchase agreement, buyer would not be in default of her purchase agreement for failing to wire her purchase price in time.

To determine whether an event occurred that allows enforcement of a force majeure clause, the following three criteria must be satisfied:

  • The unforeseeable event must be one that is out of the reasonable control of the party seeking to excuse its obligations;
  • The event must actually prevent a party’s performance under the contract and make it impossible, commercially impracticable, inadvisable, or illegal; and
  • The party seeking to excuse its obligations due to an event of force majeure must have actively taken all reasonable steps to mitigate the event or avoid its consequences.

In the midst of the current COVID-19 pandemic, parties to a contract for an event rental space would be forced to rely on the contract’s force majeure clause to excuse their respective obligations: the party renting an event center would not be able to use the event center due to a government-mandated shelter in place order (such as Executive Order N-25-20, issued by California Governor Gavin Newsom on March 12, 2020), and the party owning the event center would not be permitted to host events due to the same order.

While force majeure clauses generally excuse performance for certain enumerated events, they can be conditioned on other performance continuing, such as giving notice of the event, attempting to mitigate or reduce damage from the event, having and implementing a disaster recovery plan, or using diligent efforts to avoid the event or its consequences.

Scenario 2: There Is No Force Majeure Clause in the Contract

In the absence of a specific force majeure clause in the contract, California law can provide relief. It may take litigation to prove this, however.

California Civil Code section 1511 provides relief when performance of an obligation is made impossible by either: an irresistible, superhuman cause; or, an act of public enemies of California or the U.S.

Keep in mind that expense alone does not excuse performance. The unforeseen event must make obligating performance both “extreme and unreasonable” – in other words, impracticable.

Impracticality means that performance, while logically possible, is excused where performance would be so extreme and unreasonable that the situation is no different from one where performance is impossible. Alternatively, the frustration of purpose defense might apply. This defense is based on the premise that the contract’s purpose no longer exists. While performance may technically be possible (similar to impracticability), performance is functionally meaningless, useless, or senseless.

For example, if a company entered into a short-term lease with a landlord to rent a studio to be used for an art exhibitor in the San Francisco Bay Area from March 18 through May 15, 2020, the purpose of the lease would be determined to be a “Non-Essential Activity” under Governor Newsom’s Shelter in Place order, and no one would be able to attend the art exhibition. If the Lease contains a force majeure clause, the company could invoke a government order to be the triggering event to excuse its obligations under the lease. However, if the lease did not contain a force majeure clause, then the company would have the ability to assert a claim of frustration of purpose, because it’s foreseeable that no one would be able to attend an art exhibition due to the Shelter in Place order.

Interpreting force majeure clauses is complicated, as is determining whether performance is excused in the absence of force majeure rights due to impracticability and/or frustration of purpose. In addition, with respect to government orders, it’s important to understand that the most stringent and restrictive government order must be followed in the event that the terms of federal, state, and county orders are in conflict.

Hoge Fenton’s qualified team is here to help guide you during this difficult time. Please do not hesitate to reach out to our team below.

Shareholder/Chair
Real Estate & Land Use
Litigation
+1.925.460.3362
Of Counsel/Attorney
Corporate & Business Law
International Law
+1.925.460.3367
Attorney
Corporate & Business Law
Real Estate & Land Use
+1.408.947.2423
Attorney
Business Litigation
Insurance Coverage
+1.408.947.2414

This information is provided as an educational service by Hoge Fenton for clients & friends of the firm. This communique is an overview only, & should not be construed as legal advice or advice to take any specific action. Please be sure to consult a knowledgeable professional with assistance with your particular legal issue. © 2020 Hoge Fenton


Residential Real Estate on Pause – C.A.R. Issues a New Addendum in Response to COVID-19 that Requires Careful Consideration

Statewide and local Stay-at-Home/Shelter-In-Place orders impact nearly every aspect of our daily lives and the economy – including the real estate industry. The once hot, forever climbing California residential real estate market is suddenly on pause. The California Association of Realtors has issued a new addendum to deal with the COVID-19 pandemic.

One of the most tangible and unique things you can buy or sell is now off limits – no more open houses, home tours, or inspections.** Technology is trying to fill the gap, but there are bigger issues causing transactions to stall or get cancelled altogether:

  • Can I still afford this home?
  • Is the home still worth the purchase price I agreed to?
  • Do I still qualify for a mortgage?
  • If I sell my house, how can I move somewhere else?
  • How can we sign the documents required to close escrow?
  • If the deal cancels, what happens to the buyer’s deposit?

** As of March 28, residential real estate is considered an “essential business” if other state and local protocols are followed, including proper social distancing.

To address these and other important questions, the California Association of Realtors recently issued a new addendum for use in residential real estate transactions – the “Coronavirus Addendum/Amendment” – found here .

The Addendum is well-intentioned, but if used, it fundamentally changes the widely-used Residential Purchase Agreement (RPA) – in particular, the ability to and consequences of cancelling the deal.

Under the RPA, the seller has a certain amount of time to deliver information about the property, and the buyer has a certain amount of time to conduct inspections, secure financing, and remove all contingencies. Once the buyer removes contingencies, the deal is set – the buyer is deemed to have completed all investigation to its satisfaction and agreed to complete the transaction.

Importantly, under the RPA the buyer’s deposit becomes a form of liquidated damages owed to the seller if the buyer breaches the contract without good cause. Cancelling the deal at the last minute because of “cold feet” is a good example of this.

Currently, the RPA does not list today’s circumstances as good cause to cancel the deal. And because the RPA does not contain a force majeure clause, there is no agreed-upon list of circumstances that are unforeseeable and outside the parties’ control such that the contract cannot be performed.

The Addendum builds in today’s circumstances as good cause to postpone close of escrow, and is seemingly presented as an extension addendum. However, the Addendum actually is a substantial material change that allows either party to cancel the deal with no questions asked. This is much more than a pause or even a right to cancel due to force majeure type events; rather, the Addendum provides an unconditional right to cancel in the future, even if the parties were otherwise ready to close the deal before the Coronavirus hit.

The Addendum’s first term – which is not optional – provides that after the agreed-upon postponement period (typically 30 days), either party may cancel the deal and the buyer’s deposit shall be returned to the buyer, minus fees and costs incurred.

Before using the Addendum, buyers and sellers should ask themselves:

  • Can I afford to be stuck in this deal for another 30 days? The parties might be better served moving on immediately.
  • Is it inevitable that the deal will get cancelled after 30 days, due to loss of income, pricing changes, or other reasons? If so, there might not be a good reason to “kick the can” down the road.
  • What is the cost of allowing no questions asked cancellation? For the seller, it is the loss of the deposit as liquidated damages. For the buyer, it might be the opportunity to purchase a dream home at the right price (if the market suddenly rebounds).

The Addendum also has optional additional terms that allow the parties to cancel the deal and return the buyer’s deposit if the buyer is unable to fund the purchase loan or close escrow “due to the buyer’s loss of income from COVID-19 related issues,” or to cancel the deal outright. The Addendum does not specifically define “COVID-19 related issues,” leaving it open-ended and subject to dispute.

Selecting either of the Addendum’s optional terms, however, creates a potential conflict with the first non-optional term because then the parties have both agreed to postpone the close of escrow but, at the same time, either agreed to cancel the deal due to COVID-19 related issues or cancel the deal immediately.

Finally, the Addendum does not address lender consent, escrow consent, or other third parties’ agreements to waive or reduce fees, bills, commissions, and related claims.

If the parties use the Addendum, they should also confirm in writing their agreement to instruct escrow to cancel and return any deposit consistent with the Addendum. They should also have an agreement as to who is responsible for any consequential expenses, such as vendor payments (e.g. home inspection).

The parties should also be mindful of broker commission claims and lender fees since the Addendum does not address who is responsible for such payments. Ideally, the parties will confirm in advance with third parties that such fees will not be paid, and claims for such fees will be waived, if the transaction is cancelled pursuant to the Addendum.

Buyers and sellers should carefully read and fully understand the Addendum before using it because it potentially does a lot more than just put a pending deal on pause. Thoughtful consultation with realtors and counsel is also strongly advised, so the parties’ true intentions can be unambiguously written into the deal.

For any questions or additional information regarding the new Addendum, please do not hesitate to contact our Real Estate team below.

Shareholder
+1.408.947.2452
Shareholder
+1.408.947.2404
Shareholder/Chair
+1.925.460.3362
Attorney
+1.925.460.3370
Shareholder
+1.925.460.3365

This information is provided as an educational service by Hoge Fenton for clients and friends of the firm. This communique is an overview only, and should not be construed as legal advice or advice to take any specific action. Please be sure to consult a knowledgeable professional with assistance with your particular legal issue. © 2020 Hoge Fenton


Our trusted panel of commercial real estate advisors will analyze the impact that COVID-19 is having on Tri-Valley Commercial Real Estate, as well as the impact it could have for years to come in this complimentary webinar presented by Hoge Fenton.

We will discuss:

  • The state & local government response with Assemblywoman Catharine B. Baker
  • The current and future deal flow with Tri-Valley real estate attorney Sblend Sblendorio
  • The impact on market values and vacancies with Bay Area commercial real estate expert Michael Copeland

Meet our Trusted Tri-Valley Advisors

Speaker

Catharine B. Baker

Hoge Fenton

Special Counsel

+1.925.224.7780

email here

Speaker

Sblend Sblendorio

Hoge Fenton

Real Estate Attorney

+1.925.460.3365

email here

Speaker

Michael Copeland

Cushman & Wakefield

Managing Director

+1.925.621.3855

email here

Speaker

Donald Marek

Fremont Bank

Senior Vice President

+1.925.417.7671

email here

Moderator

Steven Kahn

Hoge Fenton

Real Estate Attorney

+1.925.460.3362

email here

 


Please note the webinar has capacity of 500 participants


This information is provided as an educational service by Hoge Fenton for clients and friends of the firm. This communique is an overview only, and should not be construed as legal advice or advice to take any specific action. Please be sure to consult a knowledgeable professional with assistance with your particular legal issue. © 2020 Hoge Fenton

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