User menu

Natural Disasters and Real Estate and Construction Contracts

Mon, 12/18/2017 - 10:04 -- admin25

by John Paul Neyland

In the wake of Hurricane Harvey, many clients will have questions about its impact on their business. When a natural disaster occurs, time is of the essence when it comes to protecting your client’s rights. Clients in the construction and real estate industries, in particular, may have concerns regarding allocation of risk, monetary exposure, delays in performance, and destruction of a project or property. Although this article is not all-encompassing, below are certain key provisions in many real estate and construction agreements that are impacted by a natural disaster.

Force Majeure

When analyzing the legal impact of a natural disaster, often the first thing that comes to mind is the force majeure provision, which applies when a party’s performance is impacted by an event beyond its control, such as a hurricane. Most real estate and construction contracts contain some form of force majeure clause. While the force majeure provision is often thought of as boilerplate language, the specific wording of the clause is vitally important. The specific language controls whether the provision acts to completely excuse a party’s performance under the contract or merely allows for a delay in a party’s performance. Therefore, it is necessary to analyze the express language of the force majeure provision to determine its impact on the parties’ obligations. Additionally, many force majeure provisions have a notice requirement as a condition precedent to invoking the protections of the provision. Therefore, it is essential to review the applicable real estate or construction agreement as soon as possible following a natural disaster to ensure your client complies with any such notice requirement, since the failure to do so may prohibit reliance on the provision.

Casualty

Casualty provisions are commonly found in real estate contracts, including real estate sales contracts and commercial leases. The casualty provision specifies the parties’ rights in the event a portion or all of the property subject to the agreement is destroyed or damaged by a casualty, such as a hurricane. Typically, in a real estate sales contract, the only remedy provided by the casualty provision is the right to terminate the contract, not the right to extend deadlines. In a commercial lease, the casualty provision often controls whether either party has a termination right. If the lease is not terminated, the provision may address the parties’ obligations to repair the premises, the tenant’s rights to rent abatement, if any, and any notices required to exercise rights under the provision. In situations where the lease is not terminated and the premises will be rebuilt, the casualty provision will often specify timing requirements for the premises to be rebuilt and whether the obligation to rebuild is limited to the amount of insurance proceeds received by the rebuilding party. 

Insurance

Of particular concern to most clients is the monetary impact of a natural disaster. Construction contracts and commercial leases typically allocate risk and provide financial protection or relief through insurance requirements. Commonly, a construction contract will require the owner or contractor to obtain a builders’ risk policy covering the project. A builders’ risk policy covers damage or destruction of a construction project occurring prior to completion of the project. Therefore, an inquiry should be made to determine if your client was obligated to procure such a policy. If so, be sure to timely and properly put the carrier on notice of the claim or potential claim.

Commercial leases also typically contain insurance provisions which may apply in these situations. The lease commonly allocates risk of loss between the landlord and tenant by requiring the landlord to maintain insurance on the buildings and common areas and requiring the tenant to maintain insurance on its personal property, improvements, equipment, and fixtures.

As you would anticipate, there are numerous contractual provisions which may be relevant after a natural disaster. In addition to the matters addressed above, an agreement may also contain provisions concerning repair obligations or delays in performance. Therefore, analyzing the express provisions of the contract is essential.

After a natural disaster such as a hurricane, clients in the real estate and construction industries are forced to deal with a variety of potentially overwhelming issues on both a personal and professional level. By knowing the key issues, you can provide guidance to your client after such an event, help them understand their rights and obligations, and make sure they comply with requirements contained in the applicable agreements.   

John Paul Neyland is an associate at Griffith Davison & Shurtleff, P.C. He can be reached at jneyland@griffithdavison.com.

Back to Top