American College of Real Estate Lawyers Tucson, Arizona March 18, FORCE MAJEURE IN BUILD-TO-SUIT LEASES By: Charles W.

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1 American College of Real Estate Lawyers Tucson, Arizona March 18, 2005 FORCE MAJEURE IN BUILD-TO-SUIT LEASES By: Charles W. Trainor An excusable delay, or force majeure, clause is an important element of all performance-based contracts, because delays occur which are beyond the ability of any party to the contract to control. Such provisions are standard fare in business contracts, and an essential part of real estate contracts. Since 9/11, force majeure clauses have become of greater importance in many other types of contracts because of the increased risk of terrorist attacks. In standard office, retail or industrial leases, the force majeure clause has always been important, but is generally a four or five-line provision which is rarely negotiated by a party. For example, if the landlord is constructing tenant improvements in an existing building, the force majeure clause will protect the landlord from tenant claims caused by excusable delays. It will also protect both the landlord and tenant from excusable delays which occur in the reconstruction of the premises after damage or destruction occurs. In the context of a build-to-suit lease, the force majeure clause becomes of greater importance for several reasons. First, the nature of a build-to-suit lease is generally the entire building (not just the tenant improvements) is being built to the tenant's specification. As a result, the construction work letter in a build-to-suit lease is much more extensive than in a standard lease. In fact, in such situations, it is not unusual for the work letter to exceed the length of the lease. The tenant is expecting the landlord to produce a particular building, usually with completed improvements, suited for its business by a particular time. The landlord is usually relying on its contractor to meet the tenant's requirements and does not want to be responsible for the contractor's delays (or at

2 least to shift the responsibilities or liabilities for such delays to the contractor). By their nature, build-to-suit leases have much greater economic implications than a lease for space in an existing single or multi-tenant building. While most leases give little credence to force majeure clauses, construction contracts treat delay, including force majeure, carefully. On a build-to-suit lease which involves a large construction project, it is wise for both the landlord and the tenant to carefully address the force majeure clause. You can be assured that it will be carefully addressed in the underlying construction contracts affecting the project. Excusable vs. Non-Excusable Delays. An excusable delay, or force majeure ("greater force"), is generally one that will justify the extension of a contractual deadline, excusing the delayed party from timely performance and default under the agreement. There are dozens of examples of excusable delay, many of which are set forth below. A non-excusable delay generally includes other delays which occur in the performance of a contract, and should have been anticipated or were caused by the party responsible for such delay or its contractor, subcontractors or consultants. Non-excusable delays usually result in penalties, defaults or other consequences. In the case of a build-to-suit lease, the tenant may include a penalty clause which would be activated for each day that the landlord is late in delivering the building due to non-excusable delay. Other Contract Provisions To Consider. When drafting an excusable delay clause, it is important to confirm that other clauses within the lease regarding times for performance are carefully coordinated in order to make the force majeure clause meaningful. First, the "time of the essence" clause is essential to the enforcement of delay claims. Although a simple clause, the absence of a time of the essence clause makes the timelines within the contract somewhat meaningless. Without the time of the essence clause, according to one court, the time

3 periods set forth in the contract can be interpreted as guidelines, rather than contract obligations (Burgess Construction Co. v. M. Morrin & Sons, 526 F.2d 108 (10th Cir. 1976)). In addition, great care must be given to clearly specifying the dates for performance. Of critical importance is the date that the timeline begins to run for construction of the project, as well as the date for completion of the contract. The circumstances of each transaction will dictate the appropriate language or documentation, but it is always an excellent idea, if the start date is not clearly specified in the contract, to execute an amendment to the contract when the time for performance begins. In leases, many times, the landlord agrees to construct the improvements within a certain period of time after approval of the plans by the municipality. This is a good example of a circumstance where the parties should agree upon the actual start date of that project. Clearly defining the date for performance is essential in implementing the force majeure provision. Non-Critical and Concurrent Delays. Many times, excusable delays will occur which do not delay the "critical path" of the project. For instance, unusual weather may occur which delays the project a few days, but the contractor may have already incorporated an anticipated number of "weather days" into its project schedule. As a further example, the delivery of certain materials may be delayed, but those components of the structure may be able to be installed at a later time without delaying the completion date of the project. Therefore, those types of delays are not "Critical Delays," and should not be the subject of force majeure extensions. Likewise, when there are multiple, concurrent force majeure events, the days of force majeure delay must be added together only to the extent that the date for performance is actually delayed. Definition of Force Majeure. Force majeure, in early leases, was defined as "Acts of God." The court in Akwa-Downey Construction Co., ASBCA No , 75-1 B.C.A. (CCH) (1975), defined Acts of God as "singular, unexpected and irregular

4 visitations of a force of nature." Obviously, force majeure in a build-to-suit lease situation should be defined broader than "uninvited forces of nature." The list of possible force majeure delays are probably endless. The following list, grouped into five categories, plus a catch-all category, lists numerous variations found by the author in a review of more than a dozen force majeure clauses: Labor Strikes Lockouts Labor Disturbances Walkouts Unavailability of Labor Materials Unavailability Theft Freight Embargo Unusual Delays in Transportation Acts of Others Vandalism Sabotage Harassment Terrorist Acts Acts of God Fires (except if caused by the contractor or subs) Floods Earthquakes Epidemics Quarantine Restrictions Accident, Fire Explosion or Catastrophe Unanticipated Weather Governmental Moratoriums Regulatory / Approval Delay Failure to Connect Utilities

5 Catch-All Phrases Beyond the Reasonable Control of the Landlord Unavoidable Calamities Unsafe Conditions on the Project Site Drafting Tips. Weather. A brief survey of force majeure cases indicated that weather delays were frequently the subject of litigation. Since any exterior construction contract will be subject to delays regarding weather, it is an area of force majeure that should be carefully considered by the drafting attorney. First, contractors will generally include, in their critical path timeline, a number of days for weather delays. A drafter should determine how many days the landlord in a build-to-suit lease has allocated for unanticipated weather, and take those into account in the force majeure clause (see sample clause below). In addition, the definition of weather delays should be carefully considered. The standard Federal construction contract refers to "unusually severe weather." The AIA Document A201 provides for excusable delays due to "adverse weather conditions not reasonably anticipatable." The AIA contract goes on to provide that a time extension as the result of weather will only be granted when (a) the weather conditions were abnormal, (b) the weather conditions could not have been reasonably anticipated, and (c) the weather conditions had an adverse affect on the scheduled construction. Documenting the Delay. In order to avoid unnecessary controversies, it is highly recommended that delays in force majeure be documented within a very short period of time after their occurrences, or waived. The typical scenario is a significantly delayed (in this example) owner, who attempts to justify the delays at the end of the project by claiming there were force majeure events which occurred near the beginning of the contract. This situation obviously creates a dispute which will be difficult to resolve without recreating events which may have happened months earlier. By requiring the immediate reporting or waiver of the force majeure events, any controversy over the

6 validity of such events can be addressed promptly, thereby avoiding recreation of facts and fading memories. The clause below attempts to deal with this issue, and a sample force majeure delay reporting form is attached hereto as an exhibit. As an alternative to a reporting form, construction meeting minutes which incorporate this information, signed by both parties, should be an alternative to the formal reporting method. Validity of Claim. The force majeure clause should address the validity of the claim by ensuring that the clause addresses the following five questions: a. Was the delay reasonable? b. Who was the cause of the delay? c. Was there actually a critical path delay extending the completion date? d. Was it concurrent with other delays? Exclusions. Certain matters should be excluded from force majeure delays, such as the financial inability of the landlord to perform. Also, in selecting the force majeure provisions to include into the contract, you should carefully take into account the party that you are representing. If a tenant prefers to process its own tenant improvement plans, and those plans are delayed, the landlord may very well not want to have the delay in processing the improvement plans by the governmental agency as a force majeure event. On the other hand, if the landlord is processing the tenant improvement plans with its building plans, it may be willing to assume the risk of a delay by the governmental agency in the approval of the plans as a force majeure event. Limitations on Force Majeure Events. No tenant wants to wait indefinitely for its building to be constructed, no matter how many force majeure events occur. Likewise, no landlord wants its rent to be delayed indefinitely, no matter how many tenant force majeure events occur. Therefore, it is important to place, in the force majeure clause or elsewhere, the limitations on the maximum number of days of delay which can occur before a termination of the lease, commencement of the rent, etc. In the case of a build-to-suit lease, where the building and improvements are being constructed

7 by the landlord, the tenant may want both the right to terminate the lease or to exercise self-help in completing the project, if the landlord's delays pass a specified date. Likewise, a landlord will want the rent under a lease to eventually begin, no matter how many days of force majeure delay a tenant has prior to opening its business. In either event, it is important to address these provisions within the body of the lease. Force Majeure Sample Clause (Build-to-Suit Lease). In the event that either party is prevented from timely performing its obligations hereunder by a Force Majeure Event (as hereinafter defined), and such Force Majeure Event (a) is timely reported as hereinafter provided, (b) actually results in a Critical Delay (as hereinafter defined) and (c) does not cause the number of Force Majeure Days (as hereinafter defined) to exceed the Maximum Force Majeure Days (as hereinafter defined) applicable to that party, if any, such party shall be excused from its timely performance hereunder, and no default shall have occurred, nor any penalties or damages shall be assessed as a result of such delay. As used herein, the term "Force Majeure Event" means the following events, to the extent that they are not caused by the negligent actions or inactions of the party, its contractors, subcontractors or consultants: (a) fires, floods, earthquakes, Unusually Severe Weather (as hereinafter defined) or other natural catastrophe; (b) labor strikes, lockouts, disturbances or walkouts, or unavailability of labor; (c) vandalism, accidents, sabotage, harassment, terrorist acts, riots or acts of war; (d) governmental moratoriums, significant and unusual delays in governmental approvals, or the failure of third parties to provide necessary services (such as utilities) to the premises; (e) unavailability, theft, or embargo of materials, or unanticipated delays in the delivery of materials; (f) unsafe conditions on the premises; or (g) matters beyond the reasonable control of the parties which are not expressly stated above, but are of the same type and character as the foregoing examples. A Force Majeure Event shall not include any occurrence caused by the financial inability of a party, its contractors or subcontractors to perform their obligations, or the delay in financial performance by a party, its contractors or subcontractors. A "Critical Delay," as used herein, is a delay caused by a Force Majeure Event which necessarily and actually results in a delay of the final date for performance of an obligation by a party (such as a completion date for improvements). Force Majeure Events, including concurrent Force Majeure Events, which do not necessarily and actually extend the final date for performance are not Critical Delays. The party experiencing a Force Majeure Event shall use its commercially reasonable efforts to minimize the Critical Delay caused by such Event. A "Force Majeure Day," as used herein, is a Business Day (as defined in Section ) of Critical Delay caused by a

8 Force Majeure Event. The "Maximum Force Majeure Days," as used herein, as it relates to Landlord's completion of the Improvements, is seventy-five (75) Business Days. The Maximum Force Majeure Days for Tenant prior to Commencement of the Rent is twenty (20) Business Days. There are no other restrictions on the Maximum Number of Force Majeure Days except as set forth in the Lease. The term "Unusually Severe Weather," as used herein, means abnormal weather conditions which could not have been reasonably anticipated and which actually delayed the performance by a party of its obligations hereunder. To the extent that a party had anticipated and included weather delays in its critical path for completion of an obligation hereunder, those anticipated days of Unusually Severe Weather must be exhausted before Force Majeure Days will be granted hereunder. No Force Majeure Days will be granted to a party unless that party has completed and submitted to the other party a fully completed and executed Excusable Delay Reporting Form in the form attached hereto. The party receiving such form must sign and return the form, approving or disapproving the Force Majeure Days to the submitting party within five (5) Business Days, or the request for Force Majeure Days shall be deemed approved. The failure of a party to submit a request for Force Majeure Days to the other party within ten (10) Business Days after the Force Majeure Event shall be deemed a waiver of the right to any Force Majeure Days as a result of the particular Force Majeure Event. In the event that the parties are holding regular construction meetings, and include an agreement of such Force Majeure Days in the construction minutes within ten (10) business days of the Force Majeure Event, such signed minutes shall be deemed to have satisfied this reporting requirement. In the event that the parties are unable to agree upon the validity of a Force Majeure Event, or the number of Force Majeure Days, the matter shall be resolved by the dispute resolution provisions of Section of the Lease

9 EXCUSABLE DELAY REPORTING FORM This Form must be submitted to Tenant within ten business days after the occurrence of an excusable delay. Failure to timely submit this Form shall result in an automatic denial of the request for excusable delay. Failure to timely respond to such request for excusable delay shall be deemed approval. Project: Owner: Tenant: Date of Request: Number of Force Majeure Days Requested: Dates on Which the Force Majeure Event Occurred: Reason for the Request: Attach supporting documentation relevant to this request (letters from suppliers, weather data, etc., as needed) The undersigned hereby certifies that Critical Delays have occurred due to a Force Majeure Event and the completion date for the project (or the portion thereof on which the undersigned is working) has been delayed for the number of days requested above as a result of reasons stated above. Revised Completion Date: Signed Date: Approved Disapproved: Reason for Disapproval Signed Date: