The uncontrolled spread of the coronavirus has significant collateral consequences, such as the non-performance of contractual terms in real estate agreements. Obviously, the main concern of all of us should be to maintain public health, however, the parties involved in an agreement must keep in mind the applicable law.
Governments, in the absence of previous similar experience, are taking measures necessary for the management of health systems but “lethal” for commercial contracts in general. Cyprus is among the countries where “lock-down” type measures have been taken.
In relation to the real estate sector, various agreements are in “turbulation”. Sales agreements, commitments to finance the purchase of a property, leases, construction agreements, property management agreements and consideration agreements raise questions as to what is to come.
For example, real estate sellers are unable to transfer at the explicitly agreed time, since the District Land Offices and other relevant public departments do not serve the public. Furthermore, buyers are unable to pay an installment due to the suspension of work with chain effects.
Legally speaking, contract law provides for specific remedies in cases where unavoidable, unforeseeable events make it impossible to implement some terms of the agreement. It is emphasized, however, that since this is private law, the parties are free to determine the future of their agreements themselves and the proposed remedies have a place where disputes arise.
As a rule, agreements constitute the assumption of binding obligations. A basic principle of contract law is that the obligations arising from agreements must be fulfilled in full.
An exception to this principle is the application of the term “force majeure” and the principle of frustration.
Force majeure
Force majeure is a term in agreements, which provides precisely for cases in which one of the parties is unable to comply with the terms of the agreement for reasons that could not be foreseen and for which he is not responsible either because he had intent or because he was negligent.
This term must have been expressly agreed in the agreement of the parties, otherwise the parties cannot invoke it.
It has been emphasized in several decisions, led by the case of Thomas Borthwick (Glasgow) Ltd. v. Fawre Fairclough Ltd. (1968), that this is a descriptive concept in relation to which testimony can be presented as to its scope. However, it is acceptable that it has a broader meaning than ‘Act of God’, since in the case of Matsoukis v. Priestman & Co (1915) a strike that had created serious problems in the defendant’s business was considered to fall within the term.
When a Contract stipulates that a condition for its execution is the absence of a force majeure event, the parties are called upon to determine whether the effects of Covid-19 constitute force majeure. First of all, in order to answer this question, the term of the agreement must be given a literal interpretation. However, the standard provisions on force majeure define it as an act of god and/or an event that could not have been foreseen and chosen by the contracting parties. It is easy to understand that the latter create disputes. Other terms provide more specific definitions of what constitutes force majeure and define it as “fire, flood, war, riot”. In such a case, in the absence of the use of the words “epidemic” or “disease”, it will probably be difficult for covid-19 to establish a force majeure reason unless the government measures that have been taken lead to other aspects of force majeure such as shortages of materials or labor and riots.
In addition to the need to include a relevant term in the text of the agreement that provides for force majeure, the event must also be unforeseeable. Thus, it is accepted that agreements concluded after the spread of the virus cannot invoke the term force majeure, since they were expected to foresee the risks they entailed.
Furthermore, in some cases the force majeure clause provides for the notification to the other party of the force majeure event within a specified period.
It is important to note that the invocation of such a clause does not mean at the same time the cancellation of the agreement. This clause can be used to facilitate the parties to execute the agreement, such as by granting a reasonable extension of time. This is the main difference between “force majeure” and “cancellation of the agreement”.
Example of a Force Majeure Clause: “Either party may be excused from the performance of any obligation imposed by this Agreement due to circumstances beyond the party’s control including compliance with any law, regulation, or directive or failure to comply with a term related to strikes, riots, floods, hurricanes, fires, explosions or any other cause of any nature beyond the party’s control.
In the event that one of the parties is unable to perform its obligations under this clause, the party shall notify the other party within a reasonable time of the occurrence of such Force Majeure Event, including its expected duration, in writing.
Upon such notice, the obligations of the party giving such notice, if affected by such Force Majeure Event, shall be suspended for the period of duration of impact.
In the event that force majeure prevents and/or affects the implementation of the agreement for more than [number] consecutive calendar days, then either party may immediately terminate this agreement, by written notice to the other party.”
Frustration
Even in the absence of contractual terms on force majeure, the parties may turn to the national law governing their agreement to seek another option.
In Cyprus Law, the termination of the agreement is provided for which is part of the Cyprus Legislation “the Law on Contracts CAP. 149”, article 56, which states: “56.
- An agreement to perform an act which is in itself impossible is void
- An agreement to perform an act which, after the conclusion of the contract, becomes impossible or unlawful due to an event which the debtor could not prevent, becomes void as soon as the act becomes impossible or illegal.
- If the promise concerns an impossible or illegal act and the debtor knew or, if he had exercised reasonable care, could have known of its impossibility or illegality, and the creditor did not know that it was impossible or illegal, the debtor is obliged to compensate the creditor for any damage that he may suffer due to the non-fulfillment of the promise.
The characteristics of this principle are the existence of a valid agreement but due to some unexpected event, for which neither party is responsible, its implementation is no longer possible. The legal authority of the principle is the English case Taylor v. Caldwell in 1863.
It should be emphasized that the courts apply the principle of cancellation of the agreement sparingly and if there is an alternative way of performing the agreement they will save the agreement.
Regarding a change in financial data, it could justify non-performance when the change was beyond what was expected. That said, a dramatic change in the revenues of a construction company due to covid -19 may justify the suspension of the construction of a project.
The result of the occurrence of cancellation in an agreement is that it becomes immediately invalid, regardless of the will of the parties. Furthermore, the legislation in an attempt to balance the interests of the parties require the return of any benefit provided by one of the two parties.
Even when the argument seems capable of substantiating the cancellation of the agreement, the parties must give timely notice and take all appropriate measures to mitigate the impact of their decisions.
Whether a force majeure clause is included in the agreement in question or Article 56 is invoked, events must occur that make it impossible to fulfill the agreement or modify the essence of the agreement.
However, it seems more practical to have the state authorities impose the solution on the parties through legislation, so that the parties are not put in the difficult position of determining whether the effects of the pandemic fall under the force majeure clause. An example is rental agreements. More specifically, on 29/03/2020, the House of Representatives amended the rental law and now owners cannot claim free possession of their property when tenants owe 3 rents. It is emphasized that rents continue to be due and in no case is the debt canceled.
The unexpected spread of the virus is testing all of humanity. In addition to the many deaths, the pandemic will leave behind a huge economic crisis at both the private and public levels. The real estate sector could not pass unscathed. The legal tools as mentioned above are present, not to eliminate but to mitigate the damage. It is important for interested parties to face the situation with good will and negotiation.
The unexpected spread of the virus is testing all of humanity. In addition to the many deaths, the pandemic will leave behind a huge economic crisis at both the private and public levels. The real estate sector could not pass unscathed. The legal tools as mentioned above are present, not to eliminate but to mitigate the damage. It is important for the interested parties to face the situation with goodwill and with negotiating patience.
This article is for informational purposes only and should not be considered legal advice.
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