This article originally appeared in the California Lawyers Association’s Real Property, Environmental and Public Law Journals Joint Issue.
As society responds to the COVID-19 pandemic, states and local governments across the United States, including the State of California, issued shelter-in place (“SIP”) orders[i] to prevent its spread. While intended to benefit Americans in the long run, these actions have resulted in massive and largely unprecedented disruptions in the economy, including record levels of unemployment and sharply limiting the ability of businesses to provide, and customers to purchase, goods and services.[ii] The effects of the pandemic are wide spread and have created financial hardships for individuals and families in every state and locality, as well as inexplicable shortages of toilet paper.[iii]
While the principal focus in the battle against COVID-19 remains on limiting the human impact and global efforts to slow its spread, it is impossible to ignore the scale of the economic impact of the virus. Like almost every other aspect of life, real estate interests and land development have not been spared from the wrath of COVID-19. Many local governments in California have implemented residential and commercial tenant protection and eviction moratoria during the pendency of the pandemic.[iv] With varying criteria, these orders generally grant temporary respite from evictions for qualifying commercial and residential tenants due to nonpayment of rent arising out of substantial decrease in income or substantial out-of-pocket medical expenses resulting from COVID-19.[v] The orders do not exempt tenants from ultimately tendering past due rent, but, instead grant said tenants an extension to respond to unlawful detainer complaints and submit payment.[vi]
From a land use perspective, COVID-19 has slowed local governments from processing and approving projects as staff shelter in place and it has disrupted the flow of equipment, materials, and labor along the supply chains necessary for development of entitled construction
projects.[vii] Additionally, certain SIP orders have expressly prohibited most construction activities, even those related to much-needed residential development, due to inherent violations in social distancing guidelines identified by the Center for Disease Control.[viii] Construction prohibitions and disruptions to any link in the supply chain have the potential to delay development, increase construction costs, decrease availability of governmental personnel for project inspections, and threaten the ability for developers to utilize certain entitlements[ix] within the statutorily proscribed time periods. These problems may be particularly acute for developers who were awarded entitlements[x] well in advance of the current pandemic or who entered into construction contracts prior to the emergence of the outbreak.[xi]
This article addresses contractual provisions and legal doctrines—the principles of force majeure, impracticability, and frustration of purpose—that may be exercised by developers and contractors to protect their investments from project delays or increased labor costs related to certain unforeseen consequences beyond their control. It is critical to note that application of these principles is a fact- and contract-specific endeavor, particularly as it relates to the impacts of COVID-19. This article is intended to provide a broad, general overview of the principles.
Read Full Article Here: The Pandemic’s Impacts on Developers and Contractors May Call for Seldom-Used Relief: An Overview of the Principles of Force Majeure, Impracticability, and Frustration of Purpose
FOOTNOTES
[i] See, e.g., State of Cal., Executive Dept., Executive Order N-33-20, (issued Mar. 19, 2020); City and County of S.F., Dept. of Public Health, Order of the Health Officer No. C19-07 (issued Mar. 16, 2020); L.A. County, Dept. of Public Health, Order of the Public Health Officer – Safer At Home Order for Control of COVID 19, (issued Mar. 16, 2020).
[ii] Filippo Taddei, COVID-19’s Historic Economic Impact, in the U.S. and Abroad (Apr. 16, 2020) John Hopkins Magazine.
[iii] Maria Nicola, Zaid Alsafi, Catrin Sohrabi, Ahmed Kerwan Ahmed Al-Jabir, Christos Iosifidis, Maliha Agha & Riaz Agha, The Socio-Economic Implications of the Coronavirus and COVID-19 Pandemic: A Review (Apr. 17, 2020).
[iv] See, e.g., State of Cal., Executive Dept., Executive Order N-37-20 (issued Mar. 27, 2020); City and County of S.F., Office of the Mayor of S.F., Fifth Supplement to Mayoral Proclamation Declaring the Existence of a Local Emergency Dated February 25, 2020 (issued Mar. 23, 2020); City of San Diego, Ord. No. 21177 (issued Mar. 25, 2020); City of L.A., Ord. No. 186585 (issued Mar. 27, 2020) <http://clkrep.lacity. org/onlinedocs/2020/20-0147-S19_ORD_186585_03-31-2020.pdf>.
[v] Alex Merritt & Daniel Maroon, COVID-19 Impacts: California Governor Newsom’s Executive Order Explained (Apr. 8, 2020).
[vi] Alfred Fraijo Jr., Emergency Tenant Protections Take Effect in the City of Los Angeles (Apr. 1, 2020).
[vii] David Robertson, Dr. Matthew Secomb, and Emily Elliott, COVID-19: Managing Force Majeure Risk in a Construction Project Supply Chain (Apr. 13, 2020).
[viii] City and County of S.F., Dept. of Public Health, Order of the Health Officer No. C19-07b (issued Mar. 31, 2020); Elizabeth J. Dye, Force Majeure, Construction Delays, Labor Shortages and COVID-19 (Mar. 30, 2020).
[ix] For purposes of this article, entitlements shall mean discretionary approvals, permits, and issuances required for development plans.
[x] Robertson et al., COVID-19: Managing Force Majeure Risk in a Construction Project Supply Chain, supra; Robert Epstein, Zackary D. Knaub, David C. Jensen & John Mascialino, For Developers and Owners: How COVID-19 Is Affecting Construction Project and Actions You Should Consider (Apr. 15, 2020).
[xi] Mark L. Johnson & Bessie Fakhri, Temporary Impracticality or Frustration of Construction Contracts During the COVID-19 Pandemic (Apr. 7, 2020).