The recent novel coronavirus (COVID-19) outbreak has caused significant disruption to the global economy, and it has the potential to create a lasting impact on the business operations of companies worldwide. We are advising our clients on several legal issues related to the situation, including workplace safety, data protection and business continuity, supply-chain disruption and more, as well as offering counsel in connection to specific challenges faced in various industries.
This list of frequently asked questions and answers provides some initial guidance on how to navigate and mitigate the challenges posed by events related to the coronavirus.
I. Public Health
1. Within the U.S., what is the public health authority that has jurisdiction over measures to control COVID-19? To what authority(ies) should we listen?
The U.S. government, working in consultation with its own public health experts from the Centers for Disease Control and Prevention (CDC), has jurisdiction over entry of persons into the territorial boundaries of the U.S. However, as a general matter, CDC and even the U.S. government have limited direct authority over public health measures within the states, their counties and municipalities. The “police power” over public health matters – such as quarantine and compelled medical examinations – generally lies with the states, which in turn have delegated this authority to their own governmental sub-units, such as counties, cities and towns. Nevertheless, because CDC and its sister federal agencies (primarily the National Institutes of Health – NIH) have such deep expertise in infectious diseases, most states and cities will follow CDC’s recommendations on matters such as the control of COVID-19. It is important that businesses and organizations involved in the delivery of health care establish contact with their local and state health departments, and adhere rigorously to measures no less strenuous than those recommended or required by those departments, because of their direct public health authority.
2. What about outside the U.S. – who has public health authority to act about control of COVID-19?
Outside the U.S., national ministries of health typically have a plenary authority over public health measures, and work through provincial and municipal health departments, although it is not unusual to encounter some tension between instructions given to municipal health departments by the provincial government, on the one hand, and instructions given to the same health departments by the national ministry of health. In any local jurisdiction, it is therefore essential to understand and keep informed simultaneously about local or municipal instructions, as well as provincial and national public health authority instructions. Organizations operating in multiple jurisdictions may wish to designate to monitor developments in relevant jurisdictions, and coordinate dissemination of guidance to the organization’s workforce.
1. What steps should employers take now in response to COVID-19?
The 2019/2020 outbreak of a novel coronavirus (“COVID-19”) is still developing and affects different employers and industries in different ways. There are, however, a number of steps that all employers can take now in order to prepare for and manage their response to the outbreak:
- Regularly update employees on developing World Health Organization (WHO) and Centers for Disease Control (CDC) guidance concerning COVID-19 and its signs and symptoms, as well as any public health recommendations issued by applicable federal, state, or local authorities.
- Instruct employees to stay away from the workplace if they believe they are experiencing symptoms of COVID-19. Remind employees of teleworking resources and sick leave policies and benefits, as applicable. Consider encouraging telework generally where practicable, particularly in geographies most affected by COVID-19.
- Provide a hygienic working environment (e.g., clean facilities regularly, make hand sanitizer available to employees), and promote preventive practices by instructing employees to stay home when sick; minimize touching their eyes, nose, and mouth; frequently disinfect objects and surfaces; and regularly wash their hands with soap and water for at least 20 seconds.
- Appoint a Human Resources representative as a central resource for employees with concerns about COVID-19.
- Instruct employees to report to the designated representative if they have recently been to a high-risk destination or been in contact with someone who has.
- Consider cancelling non-essential meetings and/or company gatherings, particularly those involving international travel. Consider limiting or postponing non-essential business travel to high-risk geographies.
- Consider preparing an internal workplace response plan, so that managers are aware of the organization’s legal obligations in respect of the outbreak, as well as the organization’s positions on matters such as work travel.
2. How should employers manage international business and personal travel?
Employers should monitor travel alerts issued by the U.S. State Department and travel advisories issued by the CDC to identify areas that are high risk for COVID-19. Employers should also consider restricting non-essential business travel to such areas, and should investigate alternatives to travel, such as video conferencing. If employees must travel, they should be instructed to follow infection control precautions, including but not limited to maintaining recommended hygiene, avoiding likely vectors of transmission, and using any protective equipment that local health authorities may recommend. Individuals returning from high-risk areas may be subject to screening at airports, mandatory quarantine, or monitored self-quarantine, depending on the jurisdiction’s laws and regulations.
Many employers are now requiring employees returning from high-risk geographies (whether the travel was for business or personal reasons) to self-quarantine and to work remotely for a period of time, in line with CDC guidance. If returning employees cannot perform their work remotely, consult with counsel for case-by-case advice on federal, state, and local law considerations around sick leave, wage payment requirements and disability discrimination.
3. What can an employer do if an employee shows symptoms?
U.S. employers generally have the right to instruct visibly ill employees to stay away from the workplace, to prevent the spread of illness. In addition, or alternatively, employers may instruct employees to work remotely. Whether employees must be paid while out sick depends on federal, state, and local law, as well as the employer’s policies, practices, and contracts. Employers may also, in some circumstances, require that employees provide fitness-for-duty certification before they are allowed to return to work. We recommend, however, consulting with counsel before requiring employees to submit to any illness-related inquiries or medical examinations that are different from those required in the ordinary course, as employers will need to navigate disability discrimination laws if imposing any such requirements.
4. What employment laws may be implicated by an employer’s response to the COVID-19 outbreak?
Among the various employment laws implicated by U.S. employers’ responses to COVID-19 are:
- Anti-Discrimination Laws: When implementing health and safety protocols, distinguish between employees based on objective non-discriminatory factors such as recent travel to a high-risk area, not protected characteristics such as ethnicity or national origin (e.g., Asian ancestry).
- Disability Accommodation Laws: Medical testing and health-related inquiries implicate laws such as the Americans with Disabilities Act (“ADA”). The ADA and analogous state and local laws also require reasonable accommodation of disabilities (e.g., a request from an employee with a medical condition to work from home or avoid business travel during the outbreak), unless the accommodation would cause undue hardship. The Equal Employment Opportunity Commission prepared helpful (albeit non-binding) ADA guidance in response to the 2009 H1N1 outbreak.
- The Occupational Safety and Health Act (“OSHA”): OSHA requires employers to provide employees with a safe working environment, including protections against “recognized hazards” which could lead to death or serious injury. Special care may be required of employers whose employees face a high risk of exposure to COVID-19 (e.g., healthcare employees, or airline and travel industry personnel), including worksite hazard assessments and training and recordkeeping protocols.
- Sick Leave Laws and the Family and Medical Leave Act: Various federal, state, and local laws provide protections for employees who are unable to work due to their own illness, the illness of a family member, or in some cases, the shutdown of a workplace due to a public health emergency. Depending on the circumstances, these protections may include paid leave or job-protected unpaid leave. An employer’s paid time off and short term disability policies and benefit plans may also be implicated.
- Wage and Hour Laws: Employee absences due to illness or quarantine, or temporary reductions in staffing or operations, may implicate federal, state, and local wage and hour laws relating to permissible salary deductions and reporting pay (i.e., wages that compensate employees who are scheduled to report to work but who are not put to work).
III. Data Protection & Business Continuity
1. Do companies need to consider privacy and security laws when collecting data from employees as part of an effort to monitor and prevent the spread of COVID-19?
Yes. Companies must remain compliant with applicable privacy and security laws. For companies in Europe, article 9 of the GDPR generally prohibits the collection of health data without explicit consent by the data subject. Nevertheless, the GDPR provides an applicable exception to process health data without consent to protect against a serious cross-border threat to public health and, in particular, to prevent communicable disease. See General Data Protection Regulation (GDPR), art. 9(i); GDPR, recital 52.
With respect to employees in California, companies are not subject to comparable comprehensive regulation of employee data, in part because the California Consumer Privacy Act largely does not apply to employees until at least 2021.
Employers should keep data related to COVID-19 infections confidential, store it securely, and dispose of it properly once it is no longer needed. Employers should implement a country-by-country approach, being mindful of varying laws and levels of emergency that may warrant exceptions.
2. Can a company disclose to a government entity if an employee has contracted COVID-19?
Generally yes, although companies must remain compliant with applicable data protection laws when disclosing identifiable employee data, especially health data, to a government entity. If a company is subject to a government-imposed reporting obligation, the company should ensure its reporting complies with applicable laws, is limited to the information legally required, and is made only to a legitimate government entity properly designated to receive such information.
As discussed above, companies with employees in Europe must comply with the GDPR with respect to disclosing employee health data. In the United States, companies should consider whether the Americans with Disabilities Act applies to the information they have collected about an employee’s COVID-19 infection and whether they are prohibited from sharing the information with a government entity.
3. How should a company communicate with employees about data processing activities related to COVID-19 data?
As a best practice, companies should communicate with employees about their approach to collecting information about COVID-19 infections among employees and about disclosures to government entities. Where possible, companies should notify and obtain an employee’s permission prior to making a disclosure. For companies with employees in Europe, the GDPR principle of transparency requires an employer to provide notice to employees even when processing under an exception, as discussed above. See GDPR, art. 5(1).
4. How should a company prepare a business continuity plan?
Companies should prepare business continuity plans to prevent workplace exposure to COVID-19 and to prepare for the potential of a widespread outbreak. The Centers for Disease Control and Prevention (CDC) and World Health Organization (WHO) both have issued interim guidance on this topic. See Interim Guidance for Businesses and Employers to Plan and Respond to Coronavirus Disease 2019 (COVID-19), CDC (Feb. 2020); Getting Your Workplace Ready for COVID-19, WHO (Feb. 27, 2020).
Regulated entities should consider applicable legal requirements that could affect a business continuity plan.
5. What should a company do with respect to business partners that are essential to the company’s operations?
Companies should engage in continuing communication with essential business partners to understand their preparedness for COVID-19 infections, business continuity plans, and the potential impact of the COVID-19 virus on the business partner’s operations. Companies should also review the implications of a potential loss of services/supplies/products from a key business partner and consider available alternative sources in the event emergent conditions arise.
6. Does the company have insurance coverage that would apply to interruption of business due to events associated with COVID-19?
Companies should review their insurance policies and consult with business advisors to determine whether their insurance coverage extends to interruption of business due to events associated with COVID-19.
IV. Life Sciences Companies and Diagnostic Laboratories
1. What can a company do if it has a product that could aid in the diagnosis or treatment of COVID-19?
For drug and biologic sponsors, FDA has begun using pre-IND discussions and highly expedited initial review to facilitate the testing of COVID-19 products. On February 25, the National Institutes of Health (NIH) initiated a randomized controlled trial of the investigational antiviral remdesivir for the treatment of COVID-19 patients. FDA will “continue to work with interested sponsors to help expedite any additional clinical trials for COVID-19 medical countermeasures that may be appropriate.” More information on FDA’s Pre-IND Consultation program can be found here.
Biological product sponsors, including vaccine developers, may contact FDA at email@example.com.
A company that is developing diagnostics, therapeutics, vaccines or other products may submit its ideas to the Biomedical Advanced Research and Development Authority (BARDA), an HHS component that supports government market research “to identify medical countermeasures with the potential to help address the COVID-19 outbreak.” Companies may submit ideas to BARDA’s online portal.
2. I’ve heard there have been problems and shortages with diagnostic tests for COVID-19. What is happening with testing?
On February 4, the FDA issued an Emergency Use Authorization (EUA) to permit the use of a CDC-developed diagnostic panel for COVID-19. Use of this test is limited to individuals who meet CDC criteria for 2019-nCoV testing and can be performed only by qualified laboratories designated by the CDC. Some of the first CDC-designed test kits experienced failures; according to the CDC, some state laboratories were unable to verify the test performance because of “performance issues” with one of the test’s three reagents (reportedly the negative control). The CDC later developed a new protocol using the two functioning reagents, having determined that excluding the faulty third reagent would not affect accuracy, and the FDA has granted discretionary authority to use the original test kits while CDC amends the existing EUA. In addition, newly manufactured CDC test kits are being prepared and distributed.
On February 29, FDA issued a second EUA for a COVID-19 diagnostic test. That test, developed by the New York State Department of Health (NYSDOH), allows for testing of individuals who meet CDC criteria by the NYSDOH (Wadsworth Center) and the New York City Department of Health and Mental Hygiene.
More information on the FDA EUAs for diagnostics is available here.
Also on February 29, FDA published an immediately-in-effect guidance document for clinical laboratories. Under this guidance, any CLIA high-complexity laboratory that develops and validates a molecular test for COVID-19 may initiate clinical testing before applying to FDA for EUA. FDA states that it will allow “a reasonable period of time” for laboratories to use such tests after their validation and while they are preparing their EUA requests, and states that FDA believes 15 days is a reasonable period of time to prepare an EUA submission for a lab-validated test. FDA states that this guidance is intended to help rapidly expand testing capacity by facilitating the development of molecular SARS-CoV-2 diagnostic assays. FDA’s guidance is available here. Email CDRH-EUA-Templates@hhs.fda.gov for a template for an EUA submission.
3. Could the spread of COVID-19 result in shortages of drugs and medical supplies?
Yes. On February 27, FDA announced that the COVID-19 outbreak “would likely impact the medical product supply chain, including potential disruptions to supply or shortages of critical medical products in the U.S.” At least one manufacturer has already reported a drug shortage to FDA, and FDA has been in contact with the makers of 20 drugs for which the API or finished drug product is sourced exclusively from China. The FDA has also contacted 180 China-based prescription drug manufacturers to request that they evaluate their supply chains and notify FDA in advance of any disruptions.1 The agency is also working with foreign regulatory agencies such as the European Medicines Agency, to assess and monitor for warning signs of potential manufacturing discontinuances or interruptions due to the outbreak. More information is available here.
Drug shortages may be reported to DrugShortages@fda.hhs.gov. In some circumstances, drug manufacturers are required to report expected shortages to the FDA.
V. Public Companies
1. What Guidance Has the SEC Given About the Coronavirus?
The SEC is closely monitoring the coronavirus and its effects on the markets and on public companies. While the Commission has not yet issued any specific guidance, it has made two general statements.
First, on January 30, 2020, Chairman Clayton noted that the SEC would monitor, and to the extent appropriate, provide guidance and other assistance to issuers and other market participants regarding disclosures related to the potential effects of coronavirus.2
Second, on February 19, 2020, the SEC released a statement on “Effects of the Coronavirus on Financial Reporting.”3 Specifically, the SEC emphasized the need to consider the following: (1) potential disclosure of subsequent events in the notes to financial statements in accordance with guidance included in Accounting Standards Codification 855, Subsequent Events; and (2) the SEC’s general policy to grant appropriate relief from filing deadlines, in situations where, in light of circumstances beyond the control of the issuer, filings cannot be completed on time with appropriate review and attention. The SEC also encouraged issuers and advisors to contact Commission staff with any need for relief or guidance.
2. What Should My Company Be Doing Now in Terms of Disclosures and SEC Reporting?
First and foremost, companies should examine their businesses to understand what effect the global spread of coronavirus could have. Consider the following:
- Personnel & Operations
- Supply Chains
Second, companies should analyze how this impacts earnings guidance and public disclosures. Do the financial forecasts provided to investors need to be modified in light of the potential impact of the coronavirus? Do public disclosures accurately convey the potential risks for business operations and performance? Pay particular attention to oral disclosures in less formal settings, as these may not be subject to the same level of vetting as written disclosures in public filings. It may be prudent to remind employees about any applicable social media or communications policy to ensure consistent messaging from those authorized to speak on behalf of the Company. A company also should determine whether the coronavirus might impair its ability to meet SEC reporting deadlines, and if so, consider seeking relief from the Commission.
Finally, it is a good time to review policies and procedures, especially those dealing with the business contingency plan. Are the policies reasonably designed to deal with the coronavirus? Has there been adequate training?
3. What Information Should Be Included in a Coronavirus Disclosure?
Disclosures will vary depending on each company’s unique circumstances. The rapidly evolving developments surrounding the coronavirus make disclosures particularly difficult. However, an effective disclosure will contain the following information:
Nature of Exposure
For some firms, the exposure is concentrated in supply chains and business operations. For others, the main concern is how the virus will dampen demand. Many will be impacted both on the supply and demand sides.
An effective disclosure will include a simple narrative explaining the nature and potential magnitude of the exposure to the coronavirus.
Has the company already felt the impact, or is this a future/potential risk?
When possible, it is helpful to distinguish between short-, mid- and long-term risks.
The SEC has taken the position that it is misleading to disclose that an event may occur when in fact it has already happened.
Companies should describe what steps they have taken and plan to take to mitigate the effects from the coronavirus.
It is important to note the risk that this mitigation may not be successful.
VI. Asset Management
1. Should private and registered funds and their sponsors consider disclosure changes in light of the emergence of COVID-19?
Fund sponsors may want to consider evaluating existing disclosure in fund offering documents (e.g., registered fund prospectuses and shareholder reports and private fund PPMs) and ADVs in light of fund investment portfolios and strategies and fund sponsor and portfolio company operations. Many disclosure documents already disclose risks of loss due to market disruptions, whether due to contagions or other relevant factors. Some may determine that existing disclosure is sufficient while others may choose to refer specifically to the potential effect of COVID-19. Sponsors may reasonably take different approaches to disclosure.
With respect to registered funds, in 2016 the Division of Investment Management (the “Division of IM ”) published its general views regarding fund disclosures reflecting risks related to current market conditions, which can be found here.
2. Are there any special business continuity planning considerations for asset managers?
Investment advisers and broker-dealers are required to have effective business continuity plans. While the SEC and FINRA have not yet made any public statements about coronavirus related to adviser/broker-dealer business continuity plans (and we have not yet seen any questions in SEC or FINRA exams), we believe that the SEC and FINRA would expect registrants to implement their business continuity plans to the extent necessary, and monitor the effectiveness of the implementation and the ability to continue to engage in business without serious interruption. In addition, we believe that the SEC and FINRA would expect registrants to take this opportunity to review and update their business continuity plans more generally to reflect the procedures to be followed in the case of the outbreak of a virus that could affect their businesses and employees. Please see Question III.4. above for additional information on business continuity plans. Fund sponsors should also consider what other practices or compliance policies could be affected if the NYSE or other market utilities or fund company vendors close or experience service disruptions (for example, mutual fund sales and valuation practices could be affected).
3. For Registered Funds Only — With the emergence of COVID-19, has the SEC or its staff provided any regulatory relief from the “in person” voting requirements under the Investment Company Act of 1940 (the “1940 Act”) that apply to investment advisory or principal underwriter contracts, Rule 12b-1 Plans, and the approval of auditors?
The SEC has not yet issued guidance specific to COVID-19. However, last year the Division of IM issued a no action letter (found here) to the Independent Directors Council (IDC) that relaxes the “in person” voting requirement in unforeseen or emergency situations under certain circumstances. Unforeseen or emergency circumstances include any circumstances that, as determined by a fund’s board, could not have been reasonably foreseen or prevented and that make it impossible or impracticable for fund directors to attend a meeting in-person. According to the relief, such circumstances would include, but not be limited to, illness or death (including of family members), natural disasters, acts of terrorism and disruptions in travel that prevent some or all directors from attending the meeting in person. A board’s determination that COVID-19 or another circumstance constitute an unforeseen or emergency situation should be evaluated in light of normal fiduciary and business judgment principles and any such determination should be identified in board meeting minutes. Under the relief, board approvals may occur telephonically, by video conference or by other means by which all participating directors may participate and communicate with each other simultaneously during a meeting (with ratification of the approval at the next in person board meeting).
The unforeseen or emergency situations relief in the IDC no action letter applies to the renewal of an investment advisory agreement, principal underwriter agreement, or Rule 12b-1 plan, in each case where there are no material changes to the relevant contract or plan, and the selection of a fund’s independent public accountant if such accountant is the same accountant as selected in the immediately preceding fiscal year. Notably, it does not apply to special situations that involve the approval of a new contract, such as for the launch of a new fund or the need for a new contract resulting from a change of control of a fund’s investment adviser.
Rule 15a-4 under the 1940 Act may also be relevant, depending on a fund’s circumstances. It permits a board to approve an interim investment advisory contract without in person voting, subject to the conditions of that rule. Notably, the easing of the in person voting requirement under Rule 15a-4 does not apply if the prior advisory contract was terminated by assignment and the adviser receives money or other benefit in connection with the assignment (a “Rule 15a-4(b)(2) Contract”). The IDC relief, however, relaxes the in person voting requirement for a Rule 15a-4(b)(2) Contract when the directors necessary for the approval previously fully discussed and considered all material aspects of the proposed matter at an in-person meeting, but did not vote on the matter at that time, provided that no director requests another in-person meeting (the so-called “prior discussion relief”). The prior discussion relief in the IDC letter also applies to a new contract, 12b-1 plan or accountant, such as in connection with a fund launch. Although perhaps less likely to be relevant in the context of COVID-19, Rule 15a-4 and/or the prior discussion relief in the IDC no action letter could be helpful depending on a fund’s specific circumstances.
The IDC has also announced that it has spoken with the Division of IM who has acknowledged the travel and health concerns related to COVID-19. The IDC has invited those affected to contact the IDC or the Division of IM if a particular circumstance is not covered by the IDC no action letter and there is interest in obtaining additional relief. Finally, it is possible that the Division of IM or the SEC could issue in-person-voting relief specific to COVID-19. The SEC provided such exemptive relief in the time immediately following the terrorist attacks of September 11, 2001 and the Division of IM issued specific no action relief in connection with the 2008 financial crisis.
VII. Real Estate
1. Will the COVID-19 outbreak allow parties to utilize force majeure clauses to excuse performance under real estate agreements?
Force majeure clauses are contract provisions that permit parties to suspend or terminate their obligations under a contract due to certain circumstances that are beyond their reasonable control. In evaluating whether the COVID-19 outbreak (or any epidemic or pandemic) will excuse performance under their contracts and agreements, companies must consider the specific language in their agreements. Force majeure clauses often enumerate qualifying circumstances and, in the context of coronavirus, companies should be looking for words such as “disease,” “epidemic,” “quarantine,” “acts of government,” “acts of God,” and “pandemic.” Alternatively, these clauses may be worded vaguely, simply noting that force majeure events are those beyond the control of the party asserting force majeure. In February of this year, the Chinese government began issuing force majeure “certificates” to Chinese companies in order to aid the companies’ claims that they cannot perform under their contracts and agreements due to the COVID-19 outbreak. Whether such certificates will be meaningful remains to be seen.
In the context of real estate agreements, there are several instances where we see a possibility for assertion of force majeure due to the COVID-19 outbreak. In leases, a landlord or tenant may be unable to perform repairs or tenant improvement projects within the period of time required under the lease (e.g., following a casualty) due to the fact that the outbreak has resulted in a lack of availability of labor and/or supplies. Similarly, borrowers in real estate financings and sellers in purchase and sale contracts may be able to assert force majeure in analogous situations on the grounds that they are unable to complete repair or restoration obligations. The resulting shortage of labor and/or supplies may also result in a landlord being unable to provide building services to its tenants in a timely manner. Borrowers and landlords may also have a case to claim force majeure in instances where they are unable to meet certain construction deadlines and milestones in their agreements. For example, certain leases may have a requirement that the landlord delivers a built-out space to the tenant by a certain date, subject to force majeure. Similarly, construction loan agreements will often include construction milestones that borrowers have to hit by a certain date, subject to force majeure.
2. Will the COVID-19 outbreak be considered a “material adverse effect” and/or “material adverse change” under real estate agreements?
Material adverse effect (or “MAE”) and material adverse change (or “MAC”) clauses in real estate agreements allow parties to terminate their obligations under a contract in the event of material changes to the conditions of the subject property. In the financing context, lenders will often include as a condition precedent to a disbursement or loan extension that no MAE has occurred. In hotel management agreements, hotel operators often have MAE or MAC clauses that excuse failure to meet certain performance metrics. The COVID-19 outbreak may have a particularly meaningful impact on the hotel industry with the possibility of canceled vacations and conferences resulting in reduced travel. While MAC clauses (allowing a purchaser or seller to walk away from a purchase and sale contract in the event of a MAC) are common in the M&A context, they are less common in real estate contracts, but do appear from time to time.
Analyzing whether there has been an MAE or MAC is a fact-specific inquiry with a relatively high hurdle for the party asserting that there has been an MAE or MAC. Historically, courts have been reluctant to assert that an MAE or MAC has occurred. For example, in the M&A context, Delaware courts often apply a fact-specific test to determine whether “the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner.”4 In a real estate transaction, it would appear difficult for the macro effects of the COVID-19 outbreak to meet this standard, but it is certainly conceivable that a certain subset of properties (e.g., a hotel in Milan, Italy) could legitimately make a case that an MAE/MAC has occurred.
3. Are there any provisions that companies should consider including in their real estate agreements to address the contractual risk of the COVID-19 outbreak?
Companies negotiating leases, loan agreements, purchase and sale contracts, and construction management agreements should consider paying close attention to their force majeure clauses. For example, a landlord negotiating a lease with a requirement to perform a major buildout of a space may want to consider specifically including disease outbreaks as an enumerated item in their force majeure clauses. Alternatively, in the joint venture context, a capital partner negotiating a construction management agreement with a construction manager affiliated with the JV’s operating partner may want to try and specifically carve out the COVID-19 outbreak from the enumerated items in the force majeure clause.
Parties negotiating MAC/MAE clauses may want to discuss whether the effects of the COVID-19 outbreak could result in an MAC/MAE in their contracts and paper their agreements accordingly. For example, in their recently agreed merger agreement, Morgan Stanley and E*TRADE have agreed that the effects of any epidemic, pandemic or disease outbreak (including COVID-19) are carved out from the scope of the MAE clause. Hotel operators negotiating hotel management agreements may want to make specific note of epidemics, pandemics and outbreaks as having the possibility to result in an MAE/MAC.
In negotiating retail leases, landlords and tenants should consider whether rent should abate in the event that an epidemic, pandemic or outbreak requires the landlord to cause the closure of the property for cleaning. For example, the North Star Mall in San Antonio, Texas was recently closed by the landlord for 24 hours in order to perform a deep cleaning on the property. In instances such as these, it should be made clear in the lease documentation whether a tenant’s rent will be pro-rated for the period of time that they were forced to close their business due to emergent circumstances. Retail tenants may also want to ensure that their leases will not penalize them for mandatory or merely recommended closures.