The Impact of Real Estate Cyber Attacks on Transactions

As real estate cyber attacks become increasingly sophisticated, their impact on industries like real estate cannot be underestimated. Title companies, crucial in the facilitation of real estate transactions, are prime targets for such attacks, potentially causing significant disruptions.

Force majeure clauses relieve parties from liability or obligation when extraordinary, uncontrollable events prevent them from fulfilling contractual duties. However, the classification of cyber-attacks as a force majeure event is subject to legal interpretation and requires a detailed and forward-thinking approach in contract drafting to keep transactions on track.

Is a Cyber Attack a Force Majeure Event?    

Force majeure clauses relieve parties from liability or obligation when extraordinary, uncontrollable events prevent them from fulfilling contractual duties. Traditionally, force majeure      events include natural disasters, wars, and similar occurrences. Because these clauses can have such a significant effect on the contractual relationship between the parties, they are strictly interpreted by Texas courts. After Covid-19, force majeure clauses were hotly litigated and debated as many were not drafted appropriately to cover delays due to the pandemic. Today, there’s a growing argument to include cyber-attacks impacting both the parties and non-parties to the contract in this category, given their unforeseen nature and potential to substantially disrupt operations.

Title Company Cyber Attacks – Are They the Only Ones?

In recent months, some of the largest and most prominent title companies have experienced significant cyber-attacks. These incidents caused operational disruptions by shutting down escrow functions, and ceased the ability to wire funds, to issue settlement statements or title commitments, and to access emails. These attacks frustrated a buyer and/or seller’s ability to comply with most purchase and sales agreements. Also, title commitments were delayed past deadlines specified in the contract, and worse, closings could not occur due to the title companies’ inability to access escrow and funding systems.

However, while the title company may execute the purchase and sales agreement to acknowledge receipt, they are actually not a party to the contract itself. This fact had many buyers and sellers rushing to re-read the force majeure clauses in their purchase and sales agreements to determine if these attacks were somehow covered or if the parties were going to be forced to negotiate an amendment to their contract. Therefore, these attacks underscore the critical need for robust cybersecurity measures and the careful drafting of contractual terms to address such risks.

While title companies are crucial to acquisitions and dispositions of real estate, they are not the only parties buyers and sellers rely on to make closings happen. For example, in order to properly fund closings, title companies are required to receive certified funds for closing from the respective financial institutions. If a bank finds itself shut down due to a cyber-attack and a lender or seller cannot wire certified funds to the title company for closing within a strict timeline, does the contract’s force majeure clause cover this issue?

Conclusion    

To ensure comprehensive protection and clarity for all parties involved in a real estate transaction, it is prudent to explicitly include cyber-attacks in force majeure clauses. Contact your attorney to address this for your business.

The increasing prevalence of cyber threats necessitates a proactive and detailed approach in contract drafting, particularly in industries vulnerable to such risks like real estate. By including explicit provisions regarding cyber-attacks in force majeure clauses, title companies, buyers, and sellers can establish a clear framework for managing such disruptions. However, it’s crucial to pair these contractual protections with robust cybersecurity measures to mitigate the risk of attacks. Consulting legal counsel is essential to ensure that the force majeure clause is comprehensive, tailored to the specific transactional context, and in compliance with relevant legal standards.