Matthew J. Schiller
Partner, Murphy Schiller & Wilkes LLP
Office: (973) 705-7431
As we say goodbye to 2021, New Jersey’s robust commercial real estate industry has a lot to look forward to in 2022. Whether it be the ever-increasing demand for new industrial space or the development of new and/or expanded tenant spaces as employees continue their return to the workplace, construction activity will likely continue to surge in 2022. Notwithstanding such, however, landlords and tenants must remain mindful that COVID-19 will continue to impact the commercial real estate industry next year and beyond.
In particular, ongoing supply chain challenges may have a serious impact on many new leases, resulting in potentially significant construction delays and unanticipated cost increases. Accordingly, landlords and tenants must anticipate these challenges and incorporate sufficient safeguards into their leases. Although parties may believe that force majeure provisions will mitigate against these risks, the applicability of force majeure provisions to supply chain challenges may be overestimated in many instances and should not be relied upon as a primary means of protection in leases.
Parties assume certain risks when entering into a contract that intervening economic and business challenges may impact a party’s ability to perform. Although many risks can be contemplated for, unanticipated and uncontrollable events may arise that render contract performance impracticable or impossible. In order to avoid contractual liability, parties may seek to rely upon duly negotiated “force majeure” contractual provisions or common law equitable concepts such as impracticability, impossibility or frustration of purpose, to excuse their failure to timely perform. Although force majeure claims were frequently asserted at the onset of COVID-19, the ability of a party to make a viable force majeure claim is much more difficult at this time.
In order to have a valid claim for relief under a force majeure provision, a party must establish: (i) an intervening event; (ii) causation; (iii) mitigation; and (iv) a contractual remedy. Accordingly, a party asserting force majeure must first establish the existence of a qualifying intervening event (e.g., the COVID-19 pandemic has resulted in certain supply chain challenges). Thereafter, the affected party must demonstrate that its performance is prevented, impeded or hindered as a direct result of the force majeure event. (e.g., the supply chain challenges resulting from the COVID-19 pandemic have prevented the landlord from timely completing its fit-out work due to the unavailability of necessary construction materials). Of critical importance, however, it is not sufficient if an intervening event merely renders performance more difficult, costly, or time-consuming, even if it means the affected party must forfeit its profit. Thus, cost increases of construction supplies and labor alone will likely not constitute a sufficient basis for a valid force majeure claim in New Jersey. Moreover, affected parties must also undertake commercially reasonable efforts to avoid or mitigate the intervening event and/or the resulting damages in order to assert a viable force majeure claim. A party experiencing supply chain issues should therefore attempt to obtain outstanding supplies from other vendors and sources and be unable to do so. Finally, a force majeure provision should set forth the relief available and provide for specific remedies or revised performance obligations in the occurrence of a force majeure event. Most commonly, performance deadlines are simply tolled for the duration of a force majeure event. Occasionally, however, other remedies including specific monetary damages, return/retainment of deposit and rent abatements may be available.
Heading into 2022, it appears that supply chain shortages will continue; however, most often, such supplies, materials and labor are available, just at greater costs than originally budgeted for. In such instances, a force majeure provision may not be applicable. Thus, parties must pay much greater attention to other leasing protections pertaining to the fit-out and delivery of space. “Turn-key” leases are particularly vulnerable to unanticipated increases in construction costs. In such instances, landlords may attempt to include a detailed scope of work and, if possible, an established budget for the performance of such work and cost-sharing mechanisms in the event that the cost of such work exceeds the stated budget. Likewise, tenants relying on allowances to fund improvements must be mindful that they will be responsible for excess costs beyond the allowance and should therefore require frequent updates from their landlords and/or contractors if any anticipated changes to the construction budget arise. Moreover, both landlords and tenants need to pay significantly greater attention to commencement date provisions in leases as construction delays can have numerous impacts on the parties ranging from rent commencement delays to potentially significant holdover rents being due under a tenant’s prior space lease.
Unfortunately, COVID-19 has and will continue to have a material impact on commercial leasing in New Jersey in many respects. It is critical for all parties to remain cognizant of the many legal challenges and issues arising from the pandemic, which are much more readily identifiable today than over the past two years. Accordingly, landlords and tenants alike must surround themselves with the right team in order to thoroughly evaluate and address any potential legal and operational challenges that may arise due to the pandemic.
Matthew J. Schiller leads the Commercial Leasing practice group at Murphy Schiller & Wilkes LLP, a commercial real estate boutique law firm based in Newark, New Jersey. MSW’s lawyers structure and negotiate leases on behalf of landlords and tenants for all kinds of commercial property, including office buildings, industrial and warehouse facilities, shopping centers, restaurants, health care facilities, marinas, sports arenas and other sites throughout New Jersey, New York, Connecticut and the rest of the country. Our lawyers have handled some of New Jersey’s largest commercial leases, including corporate headquarters and major industrial facilities.
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