by Ron Holmes –
As I sit and ponder the legal fallout of COVID-19, several gnarly legal issues float through my brain (and, as it turns out, those of other legal ponderers).
Below, I will address on a broad basis three of my favorites.
Impossibility of Performance as a Defense
Performance of a contract may be excused if the performance of the contract is rendered impossible as a result of circumstances beyond the reasonable foreseeability of the party who cannot perform. Impossibility of performance is not necessarily “force majeure”, a concept with which most of you are familiar. Force majeure involves a so-called act of God, whereas impossibility of performance may result from the subsequent passage of law rendering performance illegal or when there has been a change in circumstances of such magnitude that it would be contrary to public policy to require performance.
The question is simple: if a government mandates the closure of a business (whether a widget manufacturer or a hair salon), will the widget manufacturer be relieved of its obligation to supply Mr. X 1000 widgets a month or will the hair salon tenant be relieved of its lease obligations?
Government Closure Orders May Be Unconstitutional
The Texas Supreme Court recently weighed in on this issue in a case entitled the Hotze case. The Court was presented with the issue of whether the Texas governor’s executive orders attempting to unilaterally quell the spread of the coronavirus are unconstitutional. The Court denied to hear the case on the basis of jurisdiction, but Justice Devine, in a concurring opinion, weighed in on the merits of the constitutional challenge. While the Texas Disaster Act of 1975 does bestow upon the governor the power to issue executive orders to deal with disasters, Justice Devine is of the opinion the Texas Constitution (Article II, §1) – which states that no branch of government “shall exercise any power properly attached to either of the others” – trumps (no political pun intended) the Texas Disaster Act of 1975. Simply put, only the legislature, not the judiciary nor the executive branch, is vested with the power to suspend laws (Texas Constitution, Article I, §28).
In other words “the Texas Constitution doesn’t have a ‘pause’ button for trying times.”
I suggest Justice Devine’s concurring opinion, while not precedent, is legally solid and I suspect we will see this issue properly presented to and resolved by the Texas Supreme Court.
Are Mandated Closures a Taking?
Mandatory closures of businesses may result in a taking without just compensation. The Fifth Amendment to the United States Constitution states that private property should not be taken for public purposes without just compensation. This doctrine applies not only to real property but also to personal property. A taking can be temporary or permanent. A temporary taken is most often seen when a regulatory body issues a moratorium on the use of one’s property (e.g., land use). But what if the government effectively takes a business owner’s income by shutting down his business?
Will an executive order temporarily shutting down a business constitute a taking requiring just compensation? I am aware of two such cases relating to the government’s response to COVID-19. One is a class action involving two distinct classes, businesses which were ordered to shut down by a COVID-19 closure order and individual workers who lost their employment as a result thereof. The other involves the free exercise of religion because the plaintiff’s local church ceased operating. Neither of these cases has worked their way through the system.
In summary, it remains to be seen at this point how these gnarly legal issues will play out. Stay tuned.
If you have any questions, please contact Ron via email or (469) 916-7700 ext. 105.
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About Ron Holmes
His real estate law practice is as broad as it is deep. Mr. Holmes has served as lead counsel on real transactions all across the United States (more than twenty States), representing public and private companies, both domestic and international, in all manner of real estate transactions, including large scale multi-use land developments and high rise residential condominiums, to acquisitions and sales of operating property portfolios, office, industrial and retail leasing and virtually every other form of real estate development, construction, financing, investing and leasing.Learn more about Ron…