Real Estate - updated on Mar 30 at 10:53 am
How the COVID-19 pandemic affects real estate contracts?
In the past few weeks, we have been constantly questioned about the impacts of COVID-19 pandemic on real estate contracts in various sectors, such as retail, collaborative spaces (coworking spaces), multifamily housing in specific niches – e.g. student housing and senior housing – shopping malls, commercial real estate and industrial plants.
Amid a sometimes conflicting overwhelming amount of information, which seems to change by the minute, any attempt to definitively and exhaustively deal with the impacts of the crisis on real estate contracts would be premature. However, one can point out some trends and recommendations, as summarized below:
1. Force majeure and hardship – the pandemic will certainly affect real estate contracts, but the increasingly frequent and widespread allegation of events of force majeure and hardship cannot apply automatically or detach from the specific circumstances of each case.
This is because contracts can allocate risks arising from varied events of force majeure in different ways. Companies and individuals are not equally and uniformly affected by the crisis. In this sense, a comprehensive analysis must consider the terms and conditions of each contract and be sustained by documents that bring clarity about the specific impact of the crisis on the party seeking the review.
2. Complex contracts and structured transactions – contracts that comprise a complex array of arrangements and transactions, especially those that have as an essential element the preservation of the flow of payments, such as build-to-suit (BTS), sale-leaseback and lease purchase contracts, might have an even more rigid filter in the analysis of specific circumstances that may justify a review.
3. Real estate companies – we recommend that real estate companies, especially those whose corporate purpose include, but are not limited to, the purchase, sale and lease of properties, as well as the development of real estate projects, have clear and consistent policies for handling contract review requests, which can help to avoid a significant increase in real estate litigation. Those companies that are subject to consumer legislation must take this fact into consideration when defining these policies.
4. Balance in relation to losses – companies and individuals are clearly suffering significant losses due to the pandemic and there is a tendency that the allocation of these losses should be born jointly by market participants and the society as a whole, with a fundamental role of the Government.
5. Pandemic can bring new laws – Finally, there is a possibility that, as it has been the case in countries where the pandemic is in more advanced stages, the Government issues new rules defining parameters for the qualification of the pandemic as an event of force majeure (see Article 1, sole paragraph, of Provisional Measure No. 927/2020, which expressly qualified the pandemic as an event of force majeure for the purposes of Labor Law) or supervening hardship, as well as for the potential review of agreements of each different industry sector.
TozziniFreire's Real Estate practice partners are involved in various negotiations in the segment and are constantly updated. In dealing with the complex scenarios brought by the pandemic, count on the multidisciplinary expertise of our team to help you evaluate the conditions and make well informed decisions.