Saturday, November 8, 2008

Legal term of the day: force majeure

Well, The Donald apparently can't get another loan extension for Trump Tower Chicago, at least not without taking a haircut, and we all know how Trump likes his hair. So he's suing his lenders and demanding more time, claiming that the global financial crisis is an event of force majeure that excuses his timely performance.

I obviously haven't seen Trump's loan, so I don't know the exact wording. But I deal with these clauses all the time. Literally meaning "greater force", a force majeure clause excuses performance under contracts because of acts of God, strikes, wars, riots, natural disasters, etc. I don't have my form book in front of me, but here are some examples online.

So the global financial crisis is an event of force majeure? That's an interesting and novel theory. Does it win? I can't say since I haven't read the contract and I'm not the judge, although my gut reaction is that this is a play for time to negotiate a settlement. Part of me really likes it.

If it does succeed, oodles and gobs of borrowers are going to be going to court. The thing is that if the story is correct, Trump can get an extension but at a big price he doesn't want to pay. His lawsuit also says the lenders have been unfair by not letting him lower prices on unsold units. Lenders can require minimum prices in the loan agreement on sakes, leases, etc. -- you see this frequently. But if Trump successfully makes the argument that the lenders were unfair in refusing to recognize market conditions and let him lower prices, effectively precluding his ability to cut his losses (especially if the lenders were not even covering their funding obligations), that might look great in front of a judge or jury.

I also don't know how a NY court is going to rule; presumably that was the choice of law as it often is on big construction loans. I am not admitted in NY, but the clause will probably be construed strictly. That's just one reason why NY is often the choice for lenders on these deals. The case was filed in Queens, which IIRC was Fred Trump's base of operations.

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