COVID-19’s Impact on Drafting and Negotiating Real Estate Contracts

The COVID-19 pandemic affected (and continues to affect) the practice of law in numerous ways. While the effects may be more pronounced in certain legal practices (e.g., Zoom hearings are still often used in litigation), the pandemic has forced every lawyer to adapt their practice to some extent. The practice of real estate law is no exception.

As with many other transactional practices, the pandemic forced real estate lawyers to revisit and expand upon their force majeure provisions. A provision that many lawyers previously considered “boilerplate” became a very important factor in determining clients’ rights and remedies. In addition to the usual suspects (storms, fires, labor strikes, etc.), force majeure provisions now routinely excuse performance delays caused by pandemics, epidemics, quarantines, and supply chain issues. These changes are typically uncontroversial, although the party less likely to claim force majeure will often clarify that “quarantines” extends only to government-imposed quarantines. While each of these events may already be covered by the standard “catchall” language (e.g., “any other cause beyond the reasonable control of a party”), it has become common practice to specifically describe those circumstances to avoid ambiguity down the line.

Real estate lawyers negotiating development-related agreements have also seen an increased focus on construction timelines, budget adjustments, and liquidated damages, particularly on buildto-suit projects. These provisions have always been heavily negotiated, even before the pandemic. However, COVID-19 caused delivery delays and cost overruns on a massive scale, thereby heightening the focus on (and scrutiny of) related contractual provisions. Developers, contractors, and their respective counsel now spend even more time negotiating (1) what constitutes a “permissible” or “excused” delay and the requirements to claim such a delay,

(2) allocation of liability for any cost overruns resulting from the delay or related supply chain issues, and

(3) adjustments to any liquidated damages that would otherwise result from the delay (whether as between the developer and contractor or the developer and its tenant).

Finally, the proliferation of “work from home” policies has raised a number of drafting issues for real estate attorneys. Office leases often include covenants requiring tenants to occupy and operate their businesses within the leased premises. Office landlords and tenants must now consider and define what constitutes “occupancy” for purposes of the lease. If half of the tenant’s employees work from home on a regular basis, is the tenant in violation of the lease? What about three-quarters? In a similar vein, office landlords and tenants now spend more time negotiating subletting clauses. Tenants want more flexibility to sublet otherwise unused portions of their leased premises. Landlords tend to disfavor vacancy (even if the tenant is paying rent), but they also want to ensure they have some level of approval over the occupants of their buildings.

More than three years after the initial shutdown, COVID-19 continues to impact the practice of law in many ways. Like other specialists, real estate lawyers have encountered both short-term effects (e.g., contractual disputes relating to supply chain issues have subsided for the most part) and long-term effects (e.g., occupancy and subletting covenants will likely continue to be relevant in the coming years). The pandemic’s ongoing impacts will require real estate lawyers to employ lessons learned and remain adaptable in order to effectively manage contract risks arising from the COVID era.

Rusk is a partner at Holland & Knight LLP focusing on real estate and banking matters.

By Martin Buzak