September 29, 2020

Volume X, Number 273

September 29, 2020

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September 28, 2020

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Client Alert: Force Majeure Clauses and COVID-19: What Hotel Owners and Operators Need to Know

It is now clear that the outbreak of COVID-19 will disrupt the travel industry on a scale possibly without precedent in modern history. At this point, the United States has banned travel from China and most of Europe, several states in the U.S. have declared a State of Emergency, and the World Health Organization has declared COVID-19 a Global Pandemic. The short-term financial impact of the outbreak on the hotel industry, in particular, will undoubtedly be severe. However, neither hotel owners nor operators should assume that disruptions caused by COVID-19 will necessarily excuse the performance of contractual obligations under hotel purchase and sale agreements, hotel franchise agreements, hotel management agreements, group booking agreements, construction contracts or other hotel-related agreements. With respect to contracts in the United States, the question of whether and to what extent contractual obligations may be excused rests largely on the terms of any force majeure clause that may or may not exist in the applicable contract.

Force majeure translates literally from French as “superior force.” In law, the term often arises in the context of a force majeure clause in a contract, which is a clause that is meant to protect the parties to a contract in the event that all or part of such contract cannot be performed due to causes that are outside the reasonable control of the parties and could not have been avoided by the exercise of due care. Under most contracts governed by US law, unless there is an express force majeure provision, none will be implied by law. This reflects the principle of pacta sunt servanda, which is Latin for “agreements must be kept.”  If a contract has no force majeure clause to look to, the parties must fall back on the legal doctrine of impracticability, which is extremely vague and difficult to prove.

Force majeure clauses can vary in significant respects in different contracts. Ideally, a force majeure clause will specify exactly what events allow the clause to be invoked. If parties intend adverse weather conditions, war, civil commotion, riots, strikes, and labor disputes to excuse contractual performance, the force majeure clause should specifically include those events. No force majeure in a contract that is more than a few months old will include the COVID-19 virus by name, but many will include terms like “disease,” “illness,” “pandemic,” “epidemic,” “contagion” and/or “outbreak.” In addition, emergency measures to address an outbreak such as COVID-19 may be covered under general terms such as “work stoppages,” “unavailability of labor or materials,” “government action or inaction,” “national or local emergency,” or “quarantine.” Finally, “catch-all” provisions like “causes beyond the parties’ [or party’s] control” or “acts of God” may also be useful, but these terms are not always included in force majeure clauses and they are far more open to interpretation (and opposition) than provisions that specifically deal with a given situation.

Even if a force majeure event is specifically covered by the force majeure clause, one should not assume that all performance is automatically excused. On the contrary, sometimes the contract provides that the force majeure clause excuses performance under only a limited number of expressly identified provisions in the contract. Moreover, reliance on a force majeure clause may require a direct or indirect causal link between the event and the affected party’s failure to perform under the specific provision of the contract. Force majeure clauses also often require the party seeking to be excused from performance to provide prompt or timely written notice of the occurrence of the so-called force majeure event in question in order to be entitled to claim any delay or excused performance; and the clause may require such party to mitigate damages, potentially by seeking alternative methods of performance. Finally, many force majeure clauses do not excuse payment obligations, and some also allow for termination of the contract (which may not always be desired in a long-term beneficial contract) if the force majeure event continues for a specified (and specially negotiated) period of time.

The above discussion should be extremely relevant for hotel owners and operators. At this point, there is no question that COVID-19 will affect virtually every major aspect of hotel ownership and operations. However, the party that will legally bear the risk of loss resulting from COVID-19 may in large part depend on the language in a contractual clause that is often viewed as a mere afterthought.

If you are considering declaring a force majeure event because of COVID-19, you should carefully review your agreement and consult with legal counsel. Moreover, any hotel owner or operator who is in the process of negotiating a new contractual arrangement should advise their legal counsel to give serious attention to the force majeure clause. While often overlooked, in extraordinary times such as these, it can be one of the most important clauses in any contract.

© 2020 SHERIN AND LODGEN LLPNational Law Review, Volume X, Number 78

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About this Author

Joshua Bowman Real Estate Attorney Sherin Lodgen
Partner

Joshua M. Bowman is a partner in the firm’s Real Estate and Corporate departments and is chair of the firm’s Hospitality Practice Group.

Described by his clients as “a skilled and tenacious attorney with a collegial demeanor” who provides “a practical approach with deal-focused creativity,” Josh brings years of experience counseling local and national real estate owners and developers, institutional and non-institutional lenders, investors, tenants, contractors, and other businesses in connection with a wide variety of...

617.646.2281
Thomas Hippler Real Estate Attorney Sherin Lodgen Law Firm
Of Counsel

Thomas A. Hippler is Of Counsel in the firm’s Real Estate and Business Law departments.

Tom’s practice focuses on representation of retailers and developers in commercial real estate matters, including leasing, acquisition, development, and financing. He also represents companies on corporate matters including compliance, risk management, and governance. Tom returned to the firm after sixteen years leading the U.S. legal function of Koninklijke Ahold N.V., an international food and e-commerce retailer.

Prior to rejoining Sherin and Lodgen, Tom served as Executive Vice President and General Counsel of Ahold USA, the parent company of regional supermarkets Stop & Shop, Giant Food, and Giant/Martins, and of e-commerce food retailer Peapod. Tom left Sherin and Lodgen to join Stop & Shop in 2000 as Vice President, Real Estate Law and in that role he built its in-house Real Estate Law Department. Tom became General Counsel of Stop & Shop in 2002 and he became General Counsel of Ahold USA in 2004. His executive management responsibilities included all of Ahold USA’s Legal and Legal Compliance activities, as well as its Quality Assurance, Risk Management and Safety, and Sustainable Retailing functions. At different times during his tenure with Ahold USA and its subsidiaries, Tom’s executive responsibilities also included oversight of the real estate and construction, communications, and public and charitable affairs business functions at Stop & Shop and Giant Food.

Before joining Ahold, Tom practiced at Sherin and Lodgen for thirteen years, including seven years as a partner of the firm. Tom was also a member of the firm’s management committee.

617.646.2029
Joseph Wang Hospitality Attorney Sherin Lodgen Law Firm
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Joseph Y. Wang is a partner in the firm’s Real Estate Department and member of its Hospitality Practice Group.

He has experience in a variety of real estate matters, including land use, zoning and development, and representing landlords and tenants in office, retail, and research and development leasing matters large and small.

Joseph has been engaged in several large development projects in Boston, where he has negotiated with local and state agencies and private parties to bring brand name hotels and residential stock to the city.

He has participated in the...

617.646.2263