When Well-Drawn Real Estate Contracts Fall Short

By Michael Goodrich

February 17, 2022

 

First it was pandemic, pandemic, pandemic. Now, it’s supply chain, omicron, gas prices, labor shortages, inflation, supply chain, omicron, gas prices, supply chain. Countless lawsuits, opinions, and articles have addressed many of the legal issues that could arise in a real estate project from the pandemic. The next territory to be explored is how to deal with the aftereffects of the ongoing pandemic, labor shortages, and supply chain issues. I refer to these items as the Perfect Storm.

How might all this affect a real estate project? Many contracts contain performance clauses relating to timely completion of services or delivery of goods. Every well-drafted real estate contract (whether for a sale, lease, construction, or other type of real estate transaction) contains some time frame within which a party to the contract must perform. Because of the Perfect Storm, many performance obligations in contracts have become difficult to perform on a timely basis or cost-effectively because of the Perfect Storm.

Materials cannot be obtained, or if they can, the delivery period may be substantially beyond customary. Your supplier cannot hire enough workers to meet your needs. Prices in many areas have skyrocketed. This Perfect Storm has created the probability of a substantial number of contractual disputes and, ultimately, litigation.

While most contracts contain a force majeure clause, which may be helpful in mitigating damages or modifying performance obligations, many contracts written pre-Perfect Storm may not adequately address some of the issues presented by the Perfect Storm. Who could have predicted this confluence of events? Fortunately, common law provides some relief, such as impossibility of performance and unforeseen circumstances, but it is always preferable to be proactive in the contract phase.

Imagine that you enter a construction contract that calls for a date certain for completion, yet you cannot obtain the materials you need through no fault of your own, resulting in a breach of contract. Is the supplier liable to you because they couldn’t deliver the materials on time? Are you liable since it was not your fault?

Going forward, it will take creative drafting to achieve the protection you need in a real estate contract. Does your contract address changes in the price of materials? Who bears the burden of the increased pricing? Is there a price adjustment mechanism? Do you have a contract with a material supplier that provides penalties for failure to timely deliver or that covers liability to third parties because of the supplier’s failure to timely deliver? Are your contracts coordinated to handle the potential domino effect?

The lawsuits coming down the road have tremendous complexities and complications, and many people will be pointing the finger at somebody else in their supply chain. If you intend to enter a real estate project, I encourage you to seek legal counsel prior to entering into any agreements. It will take proper and creative drafting of contracts to help minimize risk and damage for the next perfect storm.

Michael Goodrich is a shareholder in the Decker Jones law firm in Fort Worth, with more than 35 years specializing in real estate. He is writing this column on behalf of the Society of Commercial Realtors, a regular contributor to Fort Worth Inc.

This article was published in the February issue of Fort Worth, Inc.