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Force Majeure and More

By March 23, 2021March 30th, 2021Charlie's Corner

Are you ready to learn about force majeure and more? We have the same host and guest as last week but are bringing you a different perspective. Charlie Venus and Tim Hughes review how managing the contracts and liability around leases can be similar to a construction site. While on this topic, they seamlessly transition into pandemic related risks and how the concept of force majeure will find its place in pandemic related claims. For episode one with Tim check here.

Force Majeure definition.

Edwin K Morris (5s):
Welcome to the trusted advisor podcast brought to you by Iroquois Group. Iroquois is your trusted advisor in all things insurance. This week, you’re listening to the special segment of Charlie’s corner hosted by our very own Charlie Venus. This podcast will involve general discussion of legal issues and concepts, and is for informational purposes only and does not contain or convey legal advice and does not create an attorney, client relationship. Your facts and circumstances may vary to determine your specific situation. You should consult your own legal counsel.

Charlie Venus (42s):
Welcome back everyone. We’re going to be joining Tim Hughes again today to hear about Leases, pandemic risk and get a primmer on force majeure. Now, what about from your standpoint leases? Because you know, we have a multitude of clients out there that are on bop policies and all of those people that are renting space have signed a lease and lease is a contract. What kind of problems do you see them getting into?

Tim Hughes (1m 8s):
Well, you know, we go back to where we started from a lot of the lease tenants, or like a lot of the subs where landlord hand them a lease, they want the space, they just sign it. The only thing that they might be negotiating is maybe what the rental payments going to be, and maybe what the tenant improvement allowance is going to be. But then they don’t even look at the lease document. And, you know, if they did, they might understand that maybe you shouldn’t have to replace the HVAC unit that’s on the roof. That isn’t really yours. That’s just one example of what would be defined in the lease. What are the maintenance responsibilities? What are the liabilities that you’re taking on for invitees? You know, if you have someone that comes into your space, that trips and falls in the front doorstep are you responsible, or is the landlord, I would say in most circumstances, the landlord should be because they’re the one that’s supposed to maintain the front doorstep, but sometimes these lease agreements have broad risk shifting provisions again.

Tim Hughes (2m 4s):
So looking at the insurance terms, looking at the indemnity terms and looking at the definition of where the tenants responsibility to maintain the space versus the landlord’s overall operational responsibility, that’s going to vary pretty, pretty dramatically from contract to contract,

Charlie Venus (2m 21s):
Say for a typical retail use building where you have invitees or even could be an office building where you have invitees coming to that property. When you look at it from a security standpoint, a lighting standpoint, if people are coming at night, you know, what should people be looking for in those, in those agreements?

Tim Hughes (2m 43s):
I guess my answer to that would have to be phrased by the question, do I represent the landlord or represent That I’m here, right? Because My answer’s probably going to change pretty dramatically depending on the circumstance and also in the project. So, you know, if this is a big urban situation, you know, obviously there’s going to be much more control exerted by the landlord in terms of parking spaces, amenities, security control, et cetera. If it’s an open parking arrangement, are they really going to have the security guard sitting out in the parking lot on some strip center that just has a giant food store in it? Probably not. Right. So, so the definition of what’s reasonable for one circumstance versus another might change pretty dramatically.

Tim Hughes (3m 28s):
And then the difference between what kind of building it is and what kind of operation it is that’s going to help define exactly what’s reasonable and the tenant ownership of maintenance. So for example, if I’m a tenant that is a whole building tenant and the landlord owns the building, but I control the entire building during my operations. I probably want that control. So, you know, when Amazon is moving into the crystal city area, they’re buying properties, they’re leasing properties, but they’re tended to come in and just take up a whole building and they want the control, you know, that they don’t want to just see the, the control over to the landlord. And that points to a very different direction than if I’m just a mom and pop retailer in a strip center.

Tim Hughes (4m 12s):
And the only thing that I control at that point is just the four square walls that I’m occupying as my retail tenant. I don’t want to take ownership of anything outside of that space. And in particular, the mechanical electrical and plumbing and security for the rest of the facility.

Charlie Venus (4m 28s):
So you use the term what’s reasonable depending upon the occupant or the use of that building. And I’m just curious, because, you know, last year we had so much social unrest and a lot of the, a lot of the major cities. So when that’s going on, does the definition of reasonable change?

Tim Hughes (4m 46s):
Well, I think reasonable is always in the eyes of the beholder and would always be context contingent. So, you know, if I’m, if I’m a landlord and I’ve got an urban building that I’m maintaining, at what point am I shutting down my building? At what point am I, you know, boarding up the space so that the, the plate glass doesn’t get knocked out in the middle of unrest. And I think the question about when you step in with those measures and whether the tenants would want you to step in with those measures is really going to be fact specific. This, this has been an interesting couple of months and we’re located right outside of DC and suburban Arlington.

Tim Hughes (5m 28s):
And January six, there was like a lot of stuff going on in Arlington too, including a lot of folks in a hotel that is right next to our building and our landlord shut our building down and closed the parking lot. And when the inauguration came up, they closed the parking lot for a solid week beforehand, which, you know, it was kind of a pain. If you’re trying to have clients come into building that during the time of pandemic, we don’t have as many people coming into the space. So it was less of an operational impact and, and our people could still get into the space, but it didn’t seem like an unreasonable step for them to take given the context of what had happened. Nothing ended up happening on the second go round, which is good news.

Tim Hughes (6m 9s):
And, and they’ve also done a really good job managing the building risk for the pandemic during this entire situation for us. So, you know, to get into our space, now you’ve got to have your temperature checked and you’ve got to have a swipe card to get in and out. And if you have a client come and visit, you actually have to go pick them up at the front door. They’ve got separation in terms of yet, I can only have two people in an elevator cab, you have to be six feet apart. And then the same thing is happening in our space to where we’re doing our risk management saying you have to have masks all the time, just even be in the building. So I think any of those risk management measures are always going to have to be context specific. I’m just looking forward to a time where we can be in a slightly different context and not be managing so much risk all the time.

Tim Hughes (6m 54s):
And I think that’ll be a happier day for all of us.

Charlie Venus (6m 57s):
Oh, you know, you talked about the pandemic and I know there’s issues on both the, you know, the workers’ compensation side and the liability side from a pandemic standpoint, where do you see that exposure going? Because I know like on the workers’ comp States, there’s some States that have passed laws that the burden is on the carrier to say the, if the employee got COVID, that it wasn’t work-related.

Tim Hughes (7m 21s):
So there was a big brouhaha up on Capitol Hill over the last year where one of the parties was attempting to have a flat liability waiver on all things Covid for all businesses. And that did not actually end up passing, but it was a real focal point from my vantage point. I’m not sure that they necessarily really need it because how are you going to prove where you ever got it? You know, for, for you to be able to prove a negligence case at starting point, you have to prove that there was negligence that caused your damages. So you’d have to show how you call it where, and from who, and there might be certain situations, you know, if I’m a meat packing plant in South Dakota, where 70% of the folks that work at the place have gotten sick and they’re taking odds, running the plant on the percentage of people that are going to get the bug, okay.

Tim Hughes (8m 17s):
Maybe that’s an actionable situation, right. But that’s really extreme. And, you know, compared to like anything that we’ve seen in our geographic region, at least I think the proving where you even got it from would be a real kill shot on most of the claims that are out there, where I do see a lot of issues were in the pandemic specifically they’ve come in trenches. The first traunch was everyone’s events, just stop dead. So all of a sudden it was, Oh my God, my wedding is canceled all the way up to, we had one client that basically canceled a gigantic international conference that had, I think it was 15 or 16 different hotels lined up vendors, you know, exhibition space, exhibition boosts, the whole works, right.

Tim Hughes (9m 6s):
They cancel that. I think it was Wednesday or Thursday. And the thing was supposed to start that Saturday, that particular situation has been a pretty complicated exercise in negotiating force majeure exits. They were advantaged by the fact that DC and a lot of the DC area actually had pandemic limitations on what you could do in terms of hosting people. But some jurisdictions didn’t have that. So there was a big wave of forced majeure analysis for leases, but, but even more particularly for events and conferences and that type of thing, a lot of those situations have tended to work themselves out, not necessarily for that one particular client, but for others, people wanting to keep Goodwill with their customers.

Tim Hughes (9m 50s):
So, okay, we’re going to pump this conference back, but we’re going to resign it for a year or two from now, and we’ll just keep their deposit and roll it over. And that’s been the path of least resistance for negotiated solutions with a lot of people. The next wave of pandemic risk allocation is more sort of employment focused. So when the cares act passed, there was a lot of changes that dealt with how FMLA was going to work. What qualified as an FMLA event, triggering to be able to take care of your kids if they were out of school, as opposed to necessarily just it being a health event for you or a close related relative.

Tim Hughes (10m 30s):
So there’s been a lot of tug of war, both on the employee side and also the employer side about how you manage what was a radically shifting employment while landscape there’s been an overlay since then with the CDC issuing various guidelines and those guidelines evolving over time, different States, having different requirements and limitations on what businesses can and cannot do. And then finally, like in Virginia, for example, the department of labor issued a set of protective guidelines that are enforced in terms of all businesses that they have to comply with. And there’s different stages that will apply depending on what kind of business you are and how public facing you are, but the level of protections that you have to undertake.

Tim Hughes (11m 12s):
So there’s been a fair amount of just fire hose of information for all of these businesses, taking in all these changes of legal landscape, which by the way, you know, how often do you see this much law change this rapidly, you know, never in my entire career. And how is the business owner do you deal with, with all of this coming at you at once? You know, you’re holding on for dear life and hoping that you’ve got people that can help work through those decisions and, you know, be able to keep your doors open and your lights on at the same time as managing a difficult situation for everybody. And in particular managing legal risk at the same time as dealing with these other financial risks,

Charlie Venus (11m 53s):
ask you quickly to go Back and define force majeure, because you mentioned that that’s been involved quite a bit from a contract standpoint

Tim Hughes (12m 2s):
Is a legal concept, which basically says that your performance is your non-performance of a contract is excused by an intervening event that basically has barred the party’s ability to perform the contract that was outside of people’s control. And the scope of when that clause applies a you may not have a force majeure clause in your contract, but oftentimes they’ll be there, but there’ll be somewhat limited. Sometimes there’s some common law rights started. You force majeure, without it being in the contract, but that is going to get really fact specific and also very state-by-state specific. But the basic concept is there’s some of that that has intervened that neither of us anticipated that is an excuse to performance.

Tim Hughes (12m 47s):
So I’m going to go build this building. Well, it turns out the building is being built someplace that there’s a better way. We’re not going to go build a building, right? Maybe it gets kicked off five years. Maybe the project is just dead. So there could be tug of war around those types of issues. Catastrophic events are often the triggers to those clauses. So earthquakes fires, floods, hurricanes. Those are kind of your, your standard force majeure situation pandemics have been talked about as a force majeure clause, but thank God we haven’t really had one until the last year, since we’re in the 1917, 1918 timeframe.

Tim Hughes (13m 27s):
So there’s just not a lot of law that has construed these policies and has construed this language. There’s a lot of insurance fights that are out there about what’s what’s covered, and what’s not in terms of business interruption loss in particular. And the court system works slowly under most conditions in the middle of a pandemic. The court system is glacial and every single case that we had just got frozen in place, basically for four to six months. And in that sense, it’s a good time to be a defendant because the court systems have clogged up so badly. And because of the constitutional requirement that you have a speedy trial for criminal law, all of the civil cases have gotten kicked to the back of the docket because they have to take the criminal cases first with the very light trickle of the flood that usually comes through the court system.

Tim Hughes (14m 20s):
So, you know, TBD on what is going to happen with this force, majeure clauses TBD, and what’s going to happen with the business interruption coverage in particular, I’m skeptical that there’s going to be a ton of coverage for it. And in particular, the last part on that, that last point for it to be a force majeure event and for it to be a cause that is covered for business interruption insurance, most of these policies mean it has to be an unexpected event. Well, once you’re in the middle of a pandemic, you know, you kind of can’t claim that it’s unexpected. So as all of these policies get renewed, the amount of coverage probably declines over time as opposed to expands over time.

Tim Hughes (15m 2s):
So there’s, there was maybe some narrow window of some of the cases that are going to end up being covered under these business interruption policies, but that probably declines over time because of the nature of the pie.

Charlie Venus (15m 12s):
Well, this has been fantastic, Tim. We got to wrap it up, but thanks again for joining us today. Really appreciate it.

Tim Hughes (15m 19s):
My pleasure, Charlie, and looking forward to doing this again some time. Thanks.

Edwin K Morris (15m 24s):
Thanks for listening to this edition of Charlie’s corner brought to you by Iroquois. I am Edwin Kay Morris, and I invite you to join us for the next edition of the trusted advisor podcast.