Rethinking Force Majeure in Commercial Real Estate
Translated from its French origin, the term force majeure literally refers to a “superior force”—one that is “neither anticipated nor controlled.” New Jersey Dept. of Envtl. Prot. v. Bayshore Reg’l Sewerage Auth., 340 N.J. Super. 166, 168 n.1 (App. Div. 2001).
In the contractual sense, a force majeure provision provides a remedy to excuse contractual obligations in certain uncontrollable events or effects that will render performance impracticable and conditions a party’s obligation to perform upon the non-occurrence of such enumerated events.
Certain uncontrollable events have traditionally been understood to include inclement weather, strikes and labor shortages, governmental states of emergency, fire, flood or similar disasters. Primarily considered part of the “boilerplate” of most real estate contracts, force majeure provisions have not been extensively litigated in New Jersey.
While New Jersey courts have generally upheld the validity of force majeure where the means of the invocation was express named in the provision, the courts have narrowly constructed those same provisions to include “only events or things of the same general nature or class as those specifically enumerated.”
In the wake of the COVID-19 pandemic, which has been a hotly debated force majeure topic, finding the new market equilibrium between landlords and tenants with force majeure provisions in real estate transaction negotiations.
The newest approach to negotiation of the provisions has been modeled after the historic “Good-Guy” guaranties provisions. These provisions require the tenant to give notice, the length of which will depend on the circumstances. Payment of a termination fee might be appropriate, depending on how much time remains in the term and whether the landlord has incurred substantial costs. For short-term events, abating the rent and extending the term would seem to be reasonable discussion points.
As the New Jersey courts continue to publish new case law as force majeure litigations are decided, our attorneys continue to monitor the latest developments to continue to best advocate for our real estate clients.