Coronavirus and the Impact on Real Estate
It is clear that the Coronavirus (CV), and the specific COVID-19 (C19) have created havoc in our society and throughout the world. Specifically, for those with a connection to real estate, we have witnessed the impact of C19 on the real estate industry, among all areas of our lives. In concert with this concern, another Professor and I undertook a short article that examined only a few of the many implications of C19 on the real estate area. (This other Professor is Libbi Levine Segev;—yes, our daughter, is an attorney with specialization in real estate and business.) The following is a short excerpt from this article, which will be published in the very near future.
“Numerous actions have already been taken by many states and the federal government, via police power, exercised in the interest of protecting and promoting the public health, safety and general welfare. Some of these actions have (or will have) a negative economic impact on individual property rights. Whether such actions are deemed to constitute inverse condemnation or a violation of substantive due process rights remains to be seen. For example, if a government requires individuals to stay in their homes and not operate their business, is this a taking? If the government provides for rent freezes or a moratorium on payments due, do these actions constitute a taking….
As a result of the COVID-19, there are current discussions taking place among attorneys, insurance companies and others as to whether a claim may be made by individuals and entities suffering from a forced shut down of their businesses, based on government directives that are working to solve the COVID-19 enigma. These claims may be based on the doctrine of “force majeure.” This concept is not new in the law. (The force majeure principle is often translated to mean a position that is a higher or superior force that controls in a setting. Thus, as an example, if a real estate lease required a store in a shopping center to remain open a given number of hours per day, such clause may be overridden in some instances. One such instance may be a force majeure, an outside force, such as a fire, which forces the store to close. In a similar vein, if the government, because of the COVID-19, directed that all stores close, such as those in the shopping center example, this action might constitute a force majeure.
Clearly, the issue that will arise in the setting stated would be to examine if the action by legislators is a force majeure. In one recent Note issued in March 2020, the authors, attorneys, argued how the COVID-19 could be a force majeure. Their argument centers on the position that the intent and meaning of a force majeure “refers to the occurrence of an event which is outside the reasonable control of a party and which prevents that party from performing its obligations under a contract.”
It is quite apparent that many parties to many contracts will be inhibited from performing those contracts as a result of the COVID-19. In such instance, it is likely that the force majeure argument will be asserted in many cases. These are not limited to real estate contracts. However, there are many contracts in connection with leases, sales, construction projects and many other instances connected with real estate that will, potentially, raise the force majeure issue.
Further, in dealing with real estate issues, many businesses have already witnessed new legislation and executive orders, on the Federal and state levels, that have impacted rents, mortgages, and other real estate related activity. There are governmental positions that have directed that mortgage payments can be delayed, rent payments can be late, and other delays on real estate contracts may take place where those who were to receive the payments, such as a landlord, mortgagee, bank, etc. are not allowed to assert fines, penalties, and/or interest charges because of such delay. The authority for such governmental actions may rest in the Federal Constitution or a state constitution, among other bodies of law. Will such actions by the government constitute a real estate taking? Are these actions within the insurance policies that address force majeure questions? These and many related issues will be tested and resolved by the courts in the coming months and years.”
With additional retail and other commercial and residential tenants unable to meet their rental commitments, the distress with C19 impacting real estate will continue to be an emergent issue.
Dr. Mark Lee Levine,
Professor, University of Denver