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Hurricane Preparedness: Planning for the Unexpected

June 22, 2020

Experts are predicting a busy 2020 hurricane season, which began June 1. While weathering the storm of the novel coronavirus, businesses and individuals must also prepare for the legal implications of an active hurricane season, from developing a business continuity plan to understanding potential tax relief following a disaster.

Real Estate Documents: Preparation at the Ground Level

Protective provisions in real estate contracts can preemptively address the impact of a storm and alleviate concerns should a hurricane interrupt a transaction.

  • Leases often have provisions for insurance policies, restoration obligations of the landlord, and termination rights of either party if certain duties are not met after a disaster. These can ease post-storm headaches by allocating responsibilities before a hurricane hits.
  • Purchase and sale agreements may have provisions stating whether an automatic extension is in place for the closing date and/or due diligence period in the event of a hurricane. If there is such a provision, the contract should specify the event that triggers the extension. Examples of these events include a state of emergency being declared or a tropical system making landfall. 
  • Loan documents should give specifics on lender and borrower obligations in the event of a loss due to a natural disaster. For example, a lender is often entitled to collect on insurance proceeds and may either apply it to the loan balance or the cost of repairs.

The importance of these contractual terms has been magnified by shutdowns during the coronavirus pandemic, but they are no less important in other unexpected situations. The terms are negotiable, so it would be prudent to analyze “what if” scenarios and include reasonable protections in transactional documents before it’s too late.

Supply Chain and Cash Flow Considerations: The Importance of a Business Continuity Plan

Just as you have a disaster plan for your home and family’s safety, you must also have one for your business. Planning ahead, instead of reacting after a storm hits, can minimize the impact of a hurricane on your business operations.

An emergency “kit” is vital for your business. Instead of flashlights and batteries, a business emergency kit should contain important documents and be held in a safe location or digitally. This kit could include documents such as:

  • Pre-storm photos of buildings and offices
  • Banking records
  • Insurance policies
  • Site maps
  • Employee information

You should also pick a backup location where business can continue to run if your usual site is damaged. Consider contacting your insurer to determine coverage in the event of storm damage, lost ability to operate or flooding.

Finally, employee safety is a top priority. Gather supplies, have a generator on hand, and place first aid kits throughout offices and work sites in case a hurricane strikes suddenly.

When it comes to supply chain interruptions, communication is key. Communicating early with employees, supply chain partners, clients and other affected parties can foster mutually beneficial transparency and collaboration.

For more information, the Federal Emergency Management Agency provides an in-depth Ready Business Hurricane Toolkit with valuable details about protecting your business in the event of a storm.

Force Majeure: When a Disaster Strikes at Your Contractual Obligations

Sometimes, continuing business as usual in the midst of a hurricane is difficult or entirely impossible. A force majeure contract provision may delay or excuse the nonperformance of a party when circumstances beyond the party’s control make it difficult or impossible to perform the contractual duty.

As many tenants and borrowers have learned during the coronavirus pandemic, force majeure clauses vary in what they excuse. Performance of certain obligations may be temporarily postponed following a catastrophic event, but, in many cases, parties remain obligated to meet financial obligations, including rent or mortgage payments.

Many of these provisions include a list of natural disasters, such as hurricanes or “acts of God.” Supply shortages, power outages and property damage can all affect your ability to fulfill a contract. A force majeure clause may relieve some of your obligations if your business has been heavily affected.

On the other hand, if you receive notice of intent by a party to exercise a force majeure clause, you have options, too. Often, contracts give rights to parties on the receiving end of a force majeure notice, including termination of the contract altogether after a certain period of time to obtain the goods or services elsewhere.

Many contracts require a certain amount of notice or mitigation from a party claiming nonperformance under a force majeure clause. Ultimately, force majeure analysis is highly fact-specific and largely depends on the language of the contract terms. Consider reviewing and revising your commercial contracts to make sure your interests are protected in the event of a hurricane or other disaster.

Financial Impacts: Tax Relief and Federal Aid

No matter how prepared you may be, a severe storm will often have far-reaching financial impacts. There are two main avenues for financial relief following a natural disaster: tax credits and federal aid.

The Internal Revenue Service (IRS) will often extend deadlines for estimated and installment tax payments. These extensions also often apply to payroll taxes and returns, with penalties and associated interest waived as long as the business meets the new, post-disaster deadlines. Additionally, affected taxpayers in a federally declared disaster area can get casualty loss deductions, resulting in a lower tax obligation and expedited refunds to assist in recovery costs. Depending on the disaster, the IRS may also provide free access to retirement accounts to pay for damages.

Federal aid is also often available to those impacted by a natural disaster. The Disaster Assistance Improvement Program’s website is a great starting point to see your eligibility for aid. For business owners, a business disaster loan may be available through the U.S. Small Business Administration (SBA). In some cases, the SBA may also refinance prior mortgages or liens.

Predicting a storm’s path is difficult, but there’s no harm in preparing as if you’ll be negatively affected by its destructive nature. Even if you are not in a coastal area, your suppliers and customers may be. Reviewing and understanding important operational documents and making business-specific emergency plans can give you the peace of mind you need to keep your business operational, even under the worst conditions.

Phelps Dunbar’s business law experts can assess your current risks and offer guidance on how to best position your business for survival in trying times. Please contact Derek Larsen-Chaney or any other member of Phelps’ Business team if you have any questions or need compliance advice and guidance.

Special thanks to our contributing author, Mary Grace Henley, a 2020 summer associate from Stetson University College of Law.