FEATURE ARTICLE, JUNE 2009

MAY THE FORCE BE WITH YOU
In Minnesota Federal case, residential developer Toll Bros. sustains its interpretation of force majeure clause.
Kevin Jeselnik

As real estate deals stall or go south, more parties than ever are seeking avenues to extricate themselves from unfavorable agreements. As a result, many entities and their legal counsel are reviewing and assessing their contracts carefully, looking for exit strategies based on conditions that the other side have failed to meet.

This superheated contract scrutiny includes the ubiquitous but often hastily reviewed force majeure clause, found in nearly every commercial real estate contract. Force majeure means “greater force.” This clause excuses performance of a party in the event that a greater or major force makes performance impracticable or impossible; its enforcement hinges on conditions being “beyond a party’s control.” Common exclusions include Acts of God, terrorism, wars, insurrections, labor disturbances, and shortages or delays in delivery of materials.

“Clearly, neither party to a commercial real estate contract should rely on template language for a force majeure clause, which can cover anything from natural disasters to the performance of third-party entities,” says Michael F. Jacobson, partner in the Commercial Litigation Practice Group of Michigan-based Jaffe Raitt Heuer & Weiss, P.C. “There is also a ‘due care’ consideration in the sense that the party invoking the clause must demonstrate that they exercised due care and still could not prevent or avoid the ‘failure to perform.’”

The importance of the force majeure clause was demonstrated April 7, 2009, in a judgment by the U.S. District Court, District of Minnesota [Civil No. 06-4378(DSD/JJG]; a case where Jacobson and Ira Jaffe represented Pennsylvania-based home builder Toll Bros., Inc. against a local residential real estate developer, Sienna Corporation, and its partners.

In 2004, Sienna began developing Gardenwood, a residential development in Blaine, Minnesota, to which Toll committed to close on at least 10 lots through a $750,000 deposit, contingent upon Sienna completing all contractual Phase IA land improvements. On August 25, 2006, Sienna informed Toll that it would not meet an October 1, 2006 deadline for agreed-upon land preparation. Sienna sought relief from performance of its contract with Toll, stating that its inability to meet the deadline was excused under their contract’s force majeure clause due to delays caused by the City of Blaine and the Minnesota Pollution Control Agency (MPCA).

The Toll disagreement with Sienna was eventually settled in U.S. District Court, District of Minnesota. In its Findings of Fact, Conclusion of Law and Order for Judgment, the Court ruled that Sienna failed to establish its claim that a delayed approval process and subsequent delay in completing contractual land improvement were beyond its control. Among its Conclusions of Law, the Court said:

Sienna has not shown by a preponderance of the evidence that the force majeure clause excused its anticipatory breach. The October 1, 2006, deadline was delayed due to events and circumstances within Sienna’s control. Sienna did not timely (1) pay the City the cost of its feasibility study, (2) provide the City a complete draft EAW and an up-to-date Soil Report or (3) apply for a RCWD permit or a CLOMR.

The defendants were held jointly and severally liable to refund Toll’s deposit and pay for the attorney fees incurred in enforcing the Guaranty Agreements executed by Sienna’s principals.

Jacobson notes that this case has an interesting twist in that a previous Minnesota case had allowed delays in regulatory approvals to invoke the force majeure clause of a contract. However, in Toll vs. Sienna, the Court ruled that the fact situation did not support Sienna’s interpretation of the clause.

There are several implications for the real estate community, Jacobson adds. “First, all parties to a commercial real estate contract should have a litigation attorney review all force majeure clauses, with an eye to traditional challenges, as well as less tested ones like regulatory approvals, ability to obtain financing or even solvency of subordinate partners in a deal.

“In today’s environment, entities should be prepared for such challenges, while, in other circumstances, a sustainable force majeure strategy may be employed as a way out of an unfavorable business situation.”

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