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Covid-19

Real Estate and Constructions Activities upon COVID19 Emergency – V1. UPDATED 4/1/2020

Executive Summary

The COVID-19 phenomenon and the Emergency Regulations: its impact on the Real Estate and Construction Sector. Impact on the Sector activities. Impact on legal relationships (contractual relations). Practical aspects to be considered in each case.

The phenomenon of the “Coronavirus Pandemic – COVID 19”, which affects the entire world and has been promptly recognized and declared by the World Health Organization (“WHO”), naturally also impacts in the real estate and construction world, and in particular in the most varied nature legal relationships that are developed and exist in the same.

In face of this extraordinary phenomenon, the Executive Branch of the National Government has issued several emergency regulations, mainly the following Emergency Decrees (“Decreto de Necesidad y Urgencia” – “DNU”): No. 260/2020, which provided the extension of the public health emergency established by Law N ° 27,541 for a period of 1 year (and which was amended by No. 287/2020), and No. 297/2020, which decreed the so-called “social, precuationary and mandatory isolation” (“quarantine”) initially from March 20 to March 31 of the current year, and extended by No. 325/2020 until April 12.

Said extraordinary measure implies as a general rule that people must remain in their regular home -or in the residence in which they were at the time the DNU entered into force-, and must refrain from attending their places of work, not being able to move around routes, roads and public spaces; while cultural, recreational, sporting, religious and any other type of events involving the attendance of people shall be prohibited during its term, and the opening of stores, shopping canters, wholesale and retail stores and any other place that requires the service of people shall be suspended (i.e., commercial offices).

The legislation has established, with evident restrictive criteria and in an exhaustive manner, those activities and services that, being considered “essential in the emergency”, exempt from “quarantine” the people affected to them (clarifying that, nevertheless, in such cases, their movements shall be limited to the strict performance with the activity or service in question). The list initially included in Article 6 of DNU 297/2020, was expanded by Administrative Decision No. 429/2020 of the Chief of the Cabinet of Ministers (by virtue of the powers delegated in this regard, included in the aforementioned DNU).

In this context, and considering that the pandemic and the regulations issued as a consequence seem to represent an unforeseen, unavoidable and upcoming event – elements that prima facie could make it fit as an of “Acts of God / Force Majeure Event” (in accordance with Article 1730 of the Civil and Commercial Code: “CCC”)-, it is unavoidable to conclude that such circumstances will affect (and in fact they have already began to do so) the world of Real Estate.

A priori, there are 2 scenarios:

a.- Impact on the sector activity:

By operation of the emergency regulation, the activity of the sector is already seriously impacted, in its most diverse and varied interpretations, as it does not fit into any of the exceptional cases contemplated in said emergency regulations.

In some cases there will be a total impact, such as in the field of private construction and in the commercial exploitation of real property (i.e.i.e., Shopping Centres). And in others the impact will be significant (also on a scale of magnitude), such as in those activities that eventually admit the so-called “home office” or “telework” (when appropriate, and when no impediment to develop it exists), mainly those in the field of design and professional advice, marketing, real estate business administration, etc.

But even so, they will also be inexorably limited and paralyzed at some point or time, when for their continuity they require the assistance or concurrence of people to public places, or circulating through public places (which, as said, is forbidden): i.e., executions of agreements of all kinds related to the sector, notarial interventions, administrative or registry procedures, constitution and/or delivery of guarantees, etc.

Finally, there should not be excluded the eventuality that postulates raising doubts as to their potential scope in any of the exceptional cases arise (i.e., the case provided for in subsection 6) of Article 6 of DNU 297/2020: “people who must handle a situation of force majeure”); but such cases must be consulted and weighed individually in a particular and circumstantial way, on each occasion in which they may arise, depending on their peculiarities and without losing sight of the restrictive criteria of the emergency regulations regarding exceptions to the general rule. And, in any event, if doubts persist, evaluate the possibility of resorting even to administrative and/or judicial resources to request the granting of possible authorizations and/or pronouncements of certainty in this regard.

b.- Impact on legal relationships (contractual relations):

The other scenario that will be impacted by the event will be that of contracts, which in the real estate and construction sectors express themselves in very different contexts, and in very different ways:

  • Contracts in the phase of real estate investments.
  • Contracts in the development and financing phase of the project.
  • Contracts in the phase of operation, administration and commercial exploitation of the real estate product.

The suspension of activities imposed by the emergency regulations, as a result of the “social, precautionary and mandatory isolation” measure, will have a full impact on all areas of the economy –and on the production and exchange of goods and services-, and necessarily will lead- and in fact it has already happened and is happening – to the suspension of the obligations between co-contractors, especially those that consist of obligations to do, also extending to obligations to give.

Thereupon, in face of the juncture, there will be claims to alleging  the “Act of God / Force Majeure”, at least temporarily, by one of the contracting parties (or by both reciprocally), to try to justify the impossibility of normal performance and fulfilment of the contract, with the consequent attempt of exemption from liability.

Such proposals in certain cases may also be aimed at obtaining a longer term for the respective performance, in others at the pretension of recognition of higher costs (or higher price); and even in certain cases towards both directions: extension of deadlines and price review.

In such situations, however, each particular case should be carefully analysed, with special consideration of the nature, object and purpose of the contract in question, the area or activity involved, the instance of implementation in which the relationship is, the parties´ previous behaviours, the degree of impact invoked, the particular clauses of the agreement (i.e., if eventually exists, or not, clauses by which the parties waive to the claiming of extraordinary upcoming  situations), the applicable supplementary legislation, and fundamentally, the reasonableness of the claim, to determine if the intended remedy (figure of the “Act of God / Force Majeure”), and/or the scope by which its application is intended, may be appropriate or inadmissible; all from the perspective of the general principles of law, particularly in the matter that concerns us, those of “good faith” (which indicates that contracts must be entered into, interpreted and executed in good faith) and of “equity” (which imposes the rule of preserving the balance of the contract obligations and maintaining the economic and financial equation of the relationship).

In accordance with the invocation of said figure (“Act of God / Force Majeure”), or in contrast to it (i.e., by the other contracting party), approaches from other legal institutes may also arise, addressed to support the pretension to modify, review and/or suspend the fulfilment of its obligations, such as the figures of the “Theory of Unforeseen Events in Contracts”[1]“Unjust Enrichment and balance of the contract”[2], the “Frustration of the contract purpose”[3], the “Abuse of rights[4], etc.

Similar considerations that were mentioned above to analyse the elements of “Act of God / Force Majeure” claim, will apply to analyse such other institutes.

And, with regard to certain specific contracts, usual in the real estate and construction world, the scenario could present the following situations:

Lease Agreements: Depending on the purpose, and the degree of consequences in the use and enjoyment of the thing, specific claims may be brought regarding the provisions of Article 1203 CCC.[5] For their analysis, the general considerations set forth above will be valid, and especially, and due to the peculiarities of the event that concerns us -and its way of affecting these types of relations-, the interpretation made of the last sentence of the article aforementioned.

Also in this area, and in particular in relation to the “sole residential leases” and certain minor leases with other purposes and the difficulties of this kind of tenants to meet payments, within the emergency regulations, the Executive Branch has enacted a specific DNU for this group (DNU 320/2020) establishing: (i) the freezing (non-increase) of lease price (differing the balance and/or outstanding payments to be paid in instalments), (ii) the extension of lease terms, and (iii) the suspension of evictions, all of it for a limited term, until September 30, 2020.

Contracts for sale: In the case of real estate products (functional or complementary units, lots, houses, etc.), it is likely that, due to the suspension of activities and the consequent temporary impossibility of performing the supply and/or deed obligations, the developer or seller invokes the emergency situation to claim an extension of the delivery term and/or an extension for the performance of the respective obligation.

And, for their part, there may be claims from investors or buyers, in order to review their payment obligation terms, which in any case should be proportionally related to the eventual extension that may be available for delivery obligations of the thing or its title.

Unlike those sectors with activities regulated or controlled by the State, or from sensitive sectors such as “residential leases” or cases of “residential loans”, a priori it is difficult to imagine that in this area (real estate sales between individuals, or similar investments such as “construction trusts -fideicomisos al costo-“) could arise specific emergency rules that aim to regulate this issue.

Construction contracts: In this type of contracts, in addition to the supplementary general regulation provided in the CCC (i.e., Articles 1258, 1267 and 1268, which contemplate different scenarios and effects of the upcoming impossibility of performance and destruction of the things due to Acts of God or Force Majeure), it is more common that exists specific provisions regulating the issue.

And in this field (private buildings) there may then be proposals claims from the contractors requiring the extension of the work schedule deadlines, with the exemption of fines or penalties, due to the mandatory suspension of activities as a result of the event in question, and even claims for price and costs review with identical basis; all of which in each case must be weighed according to the specific contractual provisions, and the aforementioned general principles of law and other institutes referred, with the reasonableness of the particularities of the case, and the need to prevail the reasonable equity before the reciprocal claims of transfer of the event effects to the counterparty (thus, for example, not any reasonable impact in terms, would have to import a necessary impact -and transfer of effects to the counterparty- on the price).

To conclude, it would seem useful to formulate the following practical conclusions:

  1. Prudently analyse each case and activity from the emergency regulations perspective and the legal assets protected under it.
  2. Analyse each contract in particular, with special review of the clauses that eventually regulate the matter in question, and also special consideration of the contracting background and the parties´ previous behaviours.
  3. Evaluate with due prudence and diligence of the case the degree and way of affectation of the reciprocal obligations, and the effects that the invocation of any of the aforementioned institutes could have on the performance and future development of the contract.
  4. Verify that there are no clauses or situations that prevent the invocation of such institutes (i.e., waiver clauses, etc.), or that stipulate terms and/or special ways of invocation.
  5. Evaluate plans or measures of impact mitigation, and their feasibility of implementation according to law.
  6. Weigh the impact on costs and/or term, to remedy the situation of the contract and the pending obligations of both parties, without losing sight of the reasonable fairness in the analysis and without intending inappropriate automatic or “mechanical” transfers of the detrimental effects derived from the situation and/or that the counterparty bears the risks inherent to the situation, activity or company of the other contracting party.
  7. Finally, and in accordance with the foregoing, analyse possible solutions that the same contract and/or the regulations in force for this type of situation may foresee.

[1] Article 1091 CCC.-

[2] Articles 1794 and 1119 CCC.-

[3] Article 1090 CCC.-

[4] Article 10 CCC.-

[5] Article 1203 CCC: “If by act of God or force majeure, the tenant is prevented from using or enjoying the thing, or it cannot be used for the agreement´s purpose, the termination of the contract or the suspension of the price payment for the time that the thing cannot be used or enjoyed may be requested. If the act of God does not affect the thing itself, its obligations continue as before”.-