Force Majeure and Medical Cannabis Related Real Estate Options in a COVID-19 World

Virus

By Brian Skinner, Esq.

COVID-19 has prevented countless West Virginia companies from operating normally. For example, in March 16, 2020, Governor Justice initiated efforts to contain the spread of COVID-19 by declaring a State of Emergency in West Virginia. Subsequent containment measures were announced and are continuing to be announced, including the closure of all restaurants and bars, gyms and recreation facilities, and barbershops, hair salons, and nail salons. These restrictions culminated with the issuance of a Stay at Home Order for West Virginians on March 23, 2020.  The same is true for West Virginia state government. On March 18, 2020, Governor Justice ordered cabinet secretaries to determine whether non-essential state employees that can work from home. 

Since then, many of these restrictions have been either eased or removed. Indeed, the governor released safety guidelines for the reopening of government office buildings on June 11, 2020. However, containment measures resulted in many of the functions of private businesses and state government being slowed or even stopped altogether. This includes the Bureau for Public Health which houses the Office of Medical Cannabis (OMC).

On February 18, 2020, prior to initiation of COVID-19 containment measures, the OMC stopped accepting permit applications for medical cannabis growers, processors, dispensaries, and laboratories.  But the work of reviewing the applications for approval started about the same time as non-essential state government employees were told to stop coming into their offices. The full effect of the government shutdown on OMC’s timeline is yet to be known, but it is likely that the permitting process will be slowed by government office closures. 

Office of Medical Cannabis rules require that applications for medical cannabis organizations include evidence of the applicant's clear legal title to or option to purchase the proposed site and the facility, or a fully executed copy of the applicant's unexpired lease for the proposed site. The expiration of the option to purchase a proposed site prior to the OMC’s decision to grant or deny the permit may result in an applicant becoming ineligible. 

As the permit review and approval process extends into the fall, some applicants are finding that real estate options they negotiated as a necessary component of their application for a permit are quickly coming to an end. Thus, many applicants may be in the difficult position of renegotiating a new option at considerable expense or, in the worst-case scenario, losing their option to purchase altogether. Fortunately, applicants may have contractual recourse if their contract includes a force majeure clause.

Commercial contracts often provide for a force majeure or material adverse change clause. Translated literally, “force majeure” means “superior force” in French. The legal doctrine of force majeure provides that if an event or circumstance beyond the reasonable control of the contracting parties renders performance of the contract impossible, nonperformance of the contract will be excused and will not constitute a breach, unless the contract provides otherwise. 

The rationale behind force majeure clauses is that there will always be events that cannot be anticipated and addressed, and for which neither party to an agreement is responsible.  When these circumstances occur, it is equitable and reasonable to suspend performance and extend contract deadlines.  
The term is commonly understood and contracts often encompass both acts of nature, such as floods and hurricanes, and acts of man, such as riots, strikes, and wars.  Unfortunately, many force majeure provisions in commercial contracts do not identify “pandemics” or “public health crises” as specific force majeure events. 

Unless the force majeure clause specifically refers to a “pandemic” or “public health crisis”, whether the COVID-19 pandemic qualifies may depend on whether the operative force majeure provision contains “catch-all” language. Catch-all language is intended to cover unlisted events or circumstances beyond the parties’ reasonable control that materially prevent performance. If the force majeure provision contains a catch-all, it is possible that the absence of “pandemic,” “public health crisis,” or similar language from the list of expressly enumerated events and circumstances will not preclude a party from invoking force majeure. But some jurisdictions construe force majeure catch-alls narrowly to cover only events and circumstances that are of the same nature as those that are specifically enumerated. So, the law governing the contract is key.  Unfortunately, West Virginia has virtually no case law addressing force majeure clauses or their application, particularly in the context of a pandemic or public health crisis.

If a contract doesn’t identify pandemics as force majeure events or fails to include a catch-all, the parties to the contract may be foreclosed from asserting force majeure, regardless of the governing law. That’s because if the parties to an agreement have specifically identified specific events or circumstances that could give rise to force majeure, courts will usually presume that the list was all that the parties intended to be subject to the force majeure clause and limit its application to only those events or circumstances. 

Additionally, force majeure events that merely make performance unprofitable or more difficult or expensive—as opposed to impossible—typically do not excuse the duty to perform contractual obligations. This principle can be seen in a couple of recent cases.

In an Illinois case a restaurant owner who was sued for delinquent rent payments, argued that Illinois’ stay-at-home order, and language in the lease’s force majeure clause that explicitly mentioned laws and other government action that could frustrate performance was a defense to the delinquent payments. The court determined that the stay-at-home order qualified as an “order of government” or “law” that precluded performance, but only in part. Because restaurants were allowed to offer curbside pickup and takeout, the court held that the owner was partially responsible for rent payments in proportion to the business he could have generated through takeout.

In another case from New York, a court rejected an argument by gym owners that they be excused from making rent payments under the impossibility doctrine and by virtue of economic hardship caused by COVID-19. The court held that impossibility in New York requires a showing that performance is “objectively impossible,” and although the gym owners provided affidavit testimony that their business (and personal finances) were hit hard by COVID-19, they were not destitute or otherwise completely unable to pay.

What can we learn from these cases? Force majeure clauses will be strictly and narrowly construed, and the evidentiary showing necessary for a successful impossibility argument is difficult. In cases where a force majeure clause mentions laws or government action, stay-at-home orders resulting from the COVID-19 pandemic may serve as a basis for excusing performance, but do not offer complete defense. Careful attention should be paid to the language and scope of the government order, the types of industries/businesses affected, and any subsequent modifications to the order. Furthermore, parties who want to use the clause must be prepared to provide a strong evidentiary showing of impossibility. 

Applicants for medical cannabis dispensary permits who find that their real estate options are expiring may want to be proactive and review their agreement for a force majeure clause. If an agreement includes a force majeure clause, it should be reviewed to determine if its scope expressly includes events such as a health crisis. If the agreement does not have a force majeure clause, the agreement should be reviewed for other similar “hardship” clauses or wording on non-performance which may have the same effect. 

If you intend to claim that force majeure applies, you need to review the language of the clause to determine whether there are any procedural requirements, such as notification protocols, that must be followed. You should also identify possibilities to avoid or mitigate non-performance of the contract. For instance, a party seeking to rely on force majeure may be subject to a duty to show that it has used all reasonable endeavors to avoid the effect of the outbreak. After reviewing your agreement, you should communicate with the other party to the agreement as early and clearly as possible the impact of COVID-19 on your pending application.

The impact of COVID-19 on businesses has been extremely chaotic. This may be especially true on those whose application for a medical cannabis dispensary permit includes real estate that is subject to an expiring option. While it may be possible to use a force majeure or other “hardship” clause to extend the real estate option, it is essential for those seeking to invoke such a clause that they have a thorough understanding of how the concept might apply their circumstances so as to ensure adequate protection and enforcement of their rights under the agreement.

        
Brian J. Skinner is the former General Counsel to the West Virginia Bureau for Public Health. He assisted the bureau in establishing the Office of Medical Cannabis upon enactment of the West Virginia Medical Cannabis Act by drafting procedures and legislative rules. 

This article contains general legal information and does not contain legal advice. H2C Public Policy Strategists, LLC is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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