Lead Story: Legaldictionary.net defines Force Majeure and Frustration of Purpose as follows:
Noun. Greater, superior, or irresistible force.
Noun. An event that cannot be reasonably anticipated or controlled.
Noun. An unexpected, disruptive event that may excuse a party from performing duties under a contract.
Frustration of Purpose:
Noun. A defense used for failing to fulfill duties outlined in a contract when something occurs that hinders or obstructs the reason or purpose of the contract.
2020 is still (relatively) young but these are my early front runners for the business phrases of the year as they will inevitably show up in every contractual dispute that counterparties are trying to extricate themselves from thanks to the economy grinding to a screeching halt.
Then there is the issue of Business Interruption Insurance Coverage. Per Bisnow (emphasis mine):
Business interruption insurance generally covers incomes losses when rents dry up or revenues are lost when a firm becomes unable to operate from factors outside its control. It’s an important insurance tool when it comes to paying and collecting rent. Landlords will often force tenants to keep this type of coverage to ensure they can still collect rent if a tenant’s business becomes inoperable. At the same time, landlords generally keep their own business interruption policies to deal with future rent losses.
The expectation is that renters and owners will claim the coronavirus should be covered under business interruption clauses that will protect them financially from lost rent and declining business profits.
“A lot of attention and focus seems to be going towards business interruption,” insurance brokerage HUB International Chief Sales Officer and Executive Vice President James Stuart said.
So, will these policies give landlords and tenants relief?
“Generally speaking the answer is no,” Stuart said.
(Attorney Michael) Huddleston agrees. While there are definitely exceptions that might make it apply, most of the business interruption clauses he has reviewed in the past two weeks don’t include coverage for a virus. Policies require specific language and triggering events for coverage to kick in.
Want to know what’s 100% certain? There will be a shitload (technical term) of litigation over this issue in the coming months. At a superficial level, it would seem as though business interruption insurance would be a lifeline for tenants and landlords since outbreak absolutely falls under the category of a disruption that is outside of the control of said party. Alas, in order for the policy to pay out, the contract language needs to specifically spell out the event that occurred and resulted in the business stoppage. So, landlords and tenants have both been paying their business interruption insurance for years and now it won’t help them when they need it most, mainly because the underwriter wasn’t able to imagine and quantify the economic carnage resulting from a pandemic that resulted from someone (allegedly) eating a raw ass bat on the other side of the world.
Want to know another 100% certainty? Lenders and landlords are absolutely going to require business interruption insurance policies that cover this sort of thing going forward. That likely means that the cost of doing business is about to go up substantially since insurers are going to have a difficult time pricing the risk of another world economic shutdown where they are on the hook and have to be in a strong enough financial position to pay out when/if the shit hits the fan again. On the multi-family side of things where tenants are not businesses, we are likely to see more in the way of reserves to cover both interest and operating expenses in the event of another economic shutdown, in addition to the aforementioned business interruption insurance for landlords.
Human beings tend to be very good at protecting against the last crisis we faced because hindsight is 20/20. We tend to be a whole lot worse at protecting against the next crisis because foresight is something dramatically less than that. It’s about to get more expensive to do business out there. Buckle up.
What I’m Reading
So Much For “Community”: WeWork seems to be handling the COVID outbreak about as well as you would expect:
For WeWork, already weakened after last year’s failed attempt to go public, complications from the coronavirus could deal a fatal blow. It’s refusing calls to refund customers stuck working from home or to release them from lease agreements without penalty, though it offered to waive planned rent increases in at least a couple of instances. At the same time, it’s trying to renegotiate terms with its own landlords to ease the financial burden.
Repo Depot: Leave it to the great Matt Levine to perfectly explain the chaos in the repo market:
One very general way to characterize the situation is that, when times are good, everyone loves short-term, low-risk, low-information secured financing arrangements. (I mean, everyone in the financial industry loves them.) They provide liquidity, they work quickly, they let risk-seeking traders get a lot of leverage, they let risk-averse investors park their cash safely, they perform a certain mysterious alchemy—transmuting risky investments into risk-free money claims—efficiently and at scale.
The downside is that they are tightly coupled; everything has a pretty slim margin of error, and the spell is easily broken. If you look down, if you notice that the risk-free repo arrangements are actually risky, everything comes crashing down. Information-insensitive debt arrangements are the systemic risk; they’re the things that create bank runs. One solution is to ban those arrangements, but those arrangements are very popular.
Another solution is for the market collectively to refuse to look down: When the crisis comes, when people begin to panic and demand their money back, everyone can just agree not to do that. “Everyone” there means mostly the Fed: If the Fed steps in to buy and finance everything, then that can reduce the need for a run. But it also, secondarily, can mean banks and other large financial companies: If they refuse to mark to market, if they don’t make margin calls, if they pretend everything is fine, then maybe it can be fine.
Silver Lining: People in cities with viral outbreaks and shelter in place orders have adopted nearly all of the dogs and cats in shelters, leading to a shortage. The need for companionship is as real as ever in times like this, especially for those living alone. Consider this a reminder that, even in the toughest of times, there is still good in the world.
A Sucker Born Every Minute: MLM pyramid schemes are using the COVID outbreak as an opportunity to recruit new marks…I mean members.
Wipeout: We just lots a decade of US job growth in a week. I wish that were a typo.
Charts of the Day
“Check out the size of my package” – Federal Government, probably
Source: Refinitiv IFR
The last little tiny spike on this chart is from the Great Recession. This is terrifying and we are absolutely in uncharted territory.
Source: Yahoo Finance
Nature Calls: Undercover cops in coronavirus-battered Spain have rounded up eight people accused of violating the lockdown by organizing a drug-fueled orgy in Barcelona, according to a report because YOLO. (h/t Steve Sims)
Desperate Times Call For Desperate Measures: A man ate a bag of drugs that he pulled out of his butt while under arrest in the back of a police car because Florida.
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