Coronavirus Disrupts Major Projects

As most of us have adjusted to the new reality brought on by the coronavirus (COVID-19), developers and lenders are forced to look at the resulting economic shut down on ongoing real estate projects. When this virus first started making the news late last year, few people anticipated that it would turn into a global pandemic that would virtually shut down world economic markets. In the real estate world, when this did happen, it was easy to predict that the deals that had not yet been signed, would come to a stop and/or be terminated, and that deals that had been signed would be paused and extended. But what about deals in progress and under construction?

Supply chains have not only been disrupted, but in many cases, have been stopped altogether. This could cause many borrowers to miss important benchmarks under construction loan agreements. It could also cause developers to miss delivery dates under leases and contracts. Will lenders declare loan defaults for missed benchmarks? Will tenants and buyers?

Construction loan agreements generally contain provisions that might excuse borrowers for failure to timely perform. Up until now, it would be very rare to see epidemics or pandemics listed as a Force Majeure Event under any documents. However, government shutdowns or restrictions, acts of God, or other acts beyond borrowers’ control are generally listed as Force Majeure Events. Similarly, a landlord or contract seller who misses a delivery date or other milestone should be able to rely on a similarly drafted Force Majeure clause if delayed for COVID-19 related reasons.

Going forward, we will be adding pandemic, epidemic, and global disease language to Force Majeure paragraphs in all of our documents. Just as we added terrorism language following 9/11, we quickly adjust as life throws us curves.