Coronavirus and Property Development
Some people can work from home and others cannot. Those trying to develop property will have deadlines, milestones, longstop dates, etc. to meet. They may now be in jeopardy. Indeed, the failure to achieve such dates may have severe contractual consequences.
Many parties will be willing to cooperate with one another to find solutions. On the other hand, one party may be looking for an opportunity to exploit the situation or to hedge the market.
The law is harsh in this area. Generally, contracts must be performed by both parties, no matter unforeseen difficulties. However, there are two potential mitigating factors: whether a force majeure provision applies, and the doctrine of frustration.
Literally meaning "superior force", force majeure provisions are common in commercial contracts, but surprisingly rare in property contracts. They generally excuse a party from performing a contract if some catastrophic event occurs beyond that party's control.
The effect of a force majeure provision depends on its wording. Not all provisions will refer to Government restrictions or the effects of disease.
If a contract does not contain a force majeure provision, or the provision does not cover Coronavirus-related restrictions, there can be no termination of the contract on that basis.
Frustration: the doctrine
The doctrine of frustration may be invoked by a party to a contract if
- it would be unjust to insist on the absolute performance of the contract after a significant change in circumstances; and
- there has been an outside event or extraneous change of situation; and
- there is no blame or fault on the side of the party seeking to invoke the doctrine.
If a contract has been frustrated, then the contract is terminated automatically and immediately, and both parties are discharged from further liability. It is the end of the contract.
Frustration rarely operates in property contracts
On the face of it, Coronavirus-related restrictions may amount to an event which frustrates some contracts. However, the doctrine of frustration rarely operates in the context of property contracts. For example, there is no known case of an English court finding that a lease had been frustrated. The European Medicines Agency recently made an attempt to escape its London lease on the grounds of Brexit, but that failed. During the SARS outbreak, an attempt was made by a Hong Kong resident to claim that his residential lease had been frustrated as a result of government restrictions, but his appeal to the UK Privy Council failed.
In most property cases, it will take nothing less than the destruction of the property to frustrate a contract, and an event of destruction may be a matter for insurance rather than the doctrine of frustration.
Neither party wants to terminate
The particular problem for developers is that often neither party will want the contract to be frustrated, because it will mean that the entire contract will come to an end. Whilst parts of a contract may have become impossible to perform (e.g. a deadline for a specified stage of work cannot be met), other parts remain capable of performance in due course.
There are rare cases of the partial frustration of a property contract, but there is no obvious judicial rule in which part of a development agreement, for example, can be left alive, whilst the rest of the contract is deemed impossible to perform and thus frustrated. This may be set to change, but at present the effect of the law is generally that either a contract is completely terminated because of frustration, or one party is left in breach of contract.
Taking the opportunity to vary the contract
Now that there are Government restrictions on the movement of people, the answer for many problems may be to vary contracts to push out deadlines; to postpone milestones; or to provide for contingencies, etc.
Whilst one should act now to agree variations, one should also be careful to comply with the contract in relation to documenting variations. Many contracts contain provisions which permit variations, only if set out in writing and signed by both parties. But taking legal advice is essential; there is regular litigation between parties where one thought that a variation had been agreed, whilst the other did not.
Exploiting the situation
For a party who would now rather not perform a contract, or who wants to hedge in an uncertain market, there may or may not be opportunities.
First, a buyer of property under a standard sale contract is unlikely to be excused for delaying or failing to complete a purchase as a result of Coronavirus-related restrictions.
On the other hand, in the event of Coronavirus-related restrictions forcing a delay in some other type of performance, and where the cure may be to vary the contract, one party may find that it can demand a price or concession for its cooperation. This will depend entirely on the respective negotiating positions, but it is worth considering with your lawyer.
If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Andrew Baines, Partner and Head of Michelmores' Property Litigation team.
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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.