Real estate and the impact of COVID-19
COVID-19 is increasingly disrupting our real estate industry. Tenants are starting to suspend or delay their payments unilaterally. Development projects are slowed down or suspended, and certain investments are temporarily put on hold. Credit ratings of real estate investment companies and tenants are being eroded, causing our industry, which depends highly on capital markets, to slow down. Governments are desperately trying to keep track by frantically pushing legislation through, in an attempt to balance public health against a potential economic fallout. This article provides you with answers to some of the legal questions raised by the real estate industry during this crisis.
What government measures particularly affect real estate?
Social distancing measures. Since 13 March 2020, the federal and regional governments have adopted legislation imposing urgent measures to limit the spread of the coronavirus. On 13 April 2020 at 9 p.m., the following real-estate-related measures apply:
- forced closure of shops and stores (other than food stores, pet food stores, pharmacies, newsagents, petrol stations and fuel suppliers, telecom stores (for emergency only, but excludes stores that only sell accessories) and stores for medical equipment (for emergency only)) whereby opening hours are regulated and social distancing measures apply (max. one customer per 10m2 or one customer per store for telecom and medical equipment stores) starting from 18 March 2020 at noon until and including 19 April 2020 (subject to extension, probably until 3 May 2020);
- forced closure of establishments belonging to the cultural, social, festive, folkloric, sportive or recreational sector (other than hotels with no restaurant-dining facilities, which are allowed to stay open) starting from 18 March 2020 at noon (restaurants, cafés and bars have been closed since 13 March 2020) until and including 19 April 2020 (subject to extension, probably until 3 May);
- remote working is mandatory for all non-essential businesses. For jobs that cannot be performed remotely, companies must take the necessary measures to enforce social distancing (1.5m between each person). Non-essential businesses that cannot comply with the social distancing rule must close;
- the following are prohibited: gatherings, private or public cultural, social, festive, sporting or recreational events and activities, school field-trips, youth movement activities and religious ceremonies (some exceptions apply, such as walking alone, funerals, marriages. For the latter two events, there is a set maximum number of people allowed to attend); and
- prohibition of all non-essential travel from and to Belgium.
Anyone violating these measures can be punished under criminal law (prison sentence of eight days to three months and/or fines between EUR 208 and EUR 4,000).
Regional tax measures. The following tax measures imposed have an impact on real estate:
- Brussels Capital region. The Brussels tax administration has announced a two-month deferral of payment of real estate withholding tax (Echo dated 25 March 2020). The Brussels government has announced that payment of city tax is abolished for the first semester of 2020 (Communication, 3 April 2020).
- Flemish region. The Flemish government will only issue real estate withholding tax demands in September 2020 instead of May 2020 (effectively postponing the tax due date). This measure applies to companies and natural persons. Small businesses can request an instalment payment plan and, if necessary, a waiver of interest on late payments (Flemish tax incentives). In addition, municipalities are given extra time to amend the municipal surcharges on real estate withholding taxes for the year 2020 (Communication of 2 April 2020).
- Walloon region. Deadlines for regional tax payments in Wallonia are suspended (Walloon government special mandates decision No. 2, No. 3, and No. 10).
- Federal measures. For the federal tax measures, incl. corporate taxes and VAT, see our tax briefing of 8 April 2020 (Stibbe tax briefing).
Measures affecting residential investors. For residential investors, evicting tenants is not possible at this time. This implies that if a landlord obtains a judgment declaring the termination of the lease and ordering the eviction of the tenant, such judgment cannot be enforced in Flanders between 31 March until the end date of the public health civil emergency. In Wallonia this period of unenforceability is between 19 March and 19 April 2020, and in Brussels between 17 March and 3 May 2020.
Measures affecting permitting. All consequences from administrative procedural delays are suspended. For more information on this, see the section on the question "Does COVID-19 impact the permit approval process?".
Measures affecting co-ownerships. On 9 April 2020, the government announced that any general co-ownership assembly must be postponed if it cannot comply with the safety measures ordered by the government and if such meeting is scheduled to take place between 10 March and 3 May. If it is postponed, the meeting must be held within five months following the end of the crisis period and measures to ensure the continuity of the co-ownership must be taken. Co-ownerships that have been validly held since 10 March remain valid. Co-ownership meetings can be organized through telephone and videoconference, but they will require unanimous decisions on all matters (cf. Art. 577-6, §11 Civil Code). The term of the mandate of a syndic (syndicus/syndic) and the co-ownership board are automatically extended until the next general co-ownership meeting.
Can contractors validly suspend their work without owing a compensation? Can contractors demand time extension for reason of COVID-19?
Step 1 – Check your agreement. Most construction agreements contain a force majeure clause. Read its definition, modalities and consequences carefully. The party invoking force majeure will need to satisfy two elements: (i) determine the exact cause and extent of its inability to fulfill its obligations and (ii) link that cause to the contractual definition of force majeure. The definition of force majeure can be an open-ended list of events or a specific and limited list of events, or it can be excluded from your agreement.
If there is no definition of force majeure in your agreement, the definition under Belgian statutory law applies, which requires all of the following conditions to be met:
- unforeseeability and inevitability of the circumstances creating force majeure.
COVID-19 and its direct consequences shall in principle be considered as unforeseeable and inevitable, except in case it concerns construction agreements concluded during the COVID-19 crisis. In such case, the unforeseeability criteria may not be satisfied. It is important to cater for this in agreements concluded during the current crisis.
- partial or entire impossibility in for a party to perform its obligation(s) under the agreement.
You can only invoke force majeure if there is no alternative to comply with your obligations. In principle, this impossibility element of force majeure will not be accepted if, for example, your subcontractor refuses to work during this period but another subcontractor is able to do the same work (albeit at a much higher cost), or if you are able to purchase your materials from another supplier than the one you usually work with. If performance is merely more onerous but not impossible, the event will in principle not constitute a force majeure event. Some lower courts have interpreted this condition less restrictively, whereby they conclude that the case of force majeure must lead to an economic impossibility or to a situation that is excessively onerous for the party who has to perform the service. This interpretation is, however, not shared by the majority view nor by the Supreme Court.
As a general rule, construction companies are considered to be non-essential businesses (except if their object is to construct urgent relief structures such as hospitals or to conduct urgent repair works for hospitals or similar healthcare enterprises). Construction company workers cannot work from home, so they are still permitted by law to conduct their business on site, provided that social distancing measures can and are complied with. On 25 March 2020, the real estate trade association (BVS/UPSI) shared its non-binding view in relation to COVID-19. According to BVS/UPSI COVID-19 does not qualify as force majeure and BVS/UPSI urges its members to comply with their contractual obligations during the lockdown period.
- external cause. The inability for the party invoking force majeure to fulfil its obligation must not be attributable to that party.
The burden of proof is on the party invoking the force majeure event.
To prevent disputes, the federal government adopted legislation (still to be published) that will irrefutably qualify the trade and economic impact caused by COVID-19 and the government's spread-prevention measures between 18 March until 5 April 2020 (subject to extension) as an event of force majeure. This will ease the burden of the invoking party greatly in proving force majeure. This legislation expressly carves out any payment obligation and obligations, among other things, that have been performed voluntarily during this period.
Step 2 – Assess the consequences if you wish to invoke force majeure. If there is force majeure, assess carefully the consequences defined in the agreement. Some agreements relieve only one party instead of both parties, whereas other agreements require the parties to renegotiate in good faith. Some even grant the possibility for the other party to terminate the agreement.
If there is no force majeure clause or if the consequences are not defined sufficiently or at all, each party will in principle temporarily be relieved of its obligations, i.e., for the period of the force majeure. Temporarily force majeure will extend the periods of delay by a term equal to the duration of the force majeure. If force majeure is permanent, each party has the right to terminate the agreement. Unless contractually agreed otherwise, none of the parties is entitled to any additional fee or compensation if the agreement is suspended, extended, or terminated for reason of force majeure.
Step 3 – Notify the other party formally about the force majeure. When you wish to invoke force majeure, notify the other party about the cause and consequences as soon as practicable. Agreements will usually set out a specific notification procedure and sanction for non-compliance with that procedure (i.e., invalidity of force majeure or a penalty payment) if one fails to notify the other within the contractually agreed term.
Step 4 – Mitigate, document and renegotiate. Parties have a general duty to mitigate damage, even in case of a force majeure. Make sure you document every step you take. This will allow you to defend yourself in the future should your counterparty contest the force majeure event or its duration. Ideally, try to obtain written confirmation from your counterparty stating that he or she agrees that a force majeure even has occurred. If feasible, consider renegotiating and amending the terms of your agreement.
Does COVID-19 impact the permit-approval process?
Flemish region. The Flemish government has issued a set of rules applicable to the timing regarding single permits (omgevingsvergunning). These rules allow time extensions of either 30 or 60 days to be granted for permit-application decisions, appeal decisions, time limits for lodging an appeal, as well as for the timing that should be taken into account before starting construction works or commencing operations after having a single permit has been issued. In summary:
- ongoing public consultations are suspended from 24 March until 24 April 2020;
- public consultations that have not yet started will only start after 24 April 2020;
- the term for obtaining a decision in the simplified procedure is extended by 30 days (i.e., the initial 60-day period is now extended to a 90-day period);
- the term for obtaining a decision in ordinary proceedings is extended by 60 days (i.e., the initial 105- or 120-day period is now extended to a 165- or 180-day period);
- the term for obtaining an appeal decision is extended by 60 days;
- the period within which an appeal can be lodged is extended by 30 days, i.e., the initial 30-day period is now extended to a 60-day period;
- specific periods apply to deadlines and administrative obligations in the context of RUPs, regulations and complex projects and vacant or abandoned premises.
Brussels capital region. On 2 April 2020, all administrative deadlines, appeal periods, and time-limits having legal effect have been suspended retroactively from 16 March, and this suspension will last until 16 April (subject to extension, which can be commanded twice, each time being a 30-day period).
Walloon region. All administrative deadlines, including the appeal periods, have been suspended retroactively from 18 March, and this suspension will last until 17 April (subject to extension, which can be commanded twice, each time being a 30-day period).
Council of State. Similar legislation is being proposed for the procedures before the Council of State (Raad van State/Conseil d'Etat). The filing, processing, and hearing deadlines between 18 March 2020 and 19 April 2020 for actions before the Council of State (other than extremely urgent cases) are extended by a term of 30 days.
These measures will cause considerable delays for real estate developments, especially those that are still in the permit-obtaining phase for their construction. Projects that have already been granted a permit for construction must also take into account that the waiting period before a permit becomes final (i.e., when the permit can no longer be opposed/appealed) becomes considerably longer (and is even suspended in the Brussels Capital Region and Wallonia).
Are tenants allowed to suspend or delay their payment obligations under the lease? What aspects must be considered?
Multiple landlords are faced with notices from tenants about their unilateral decision to suspend payments, to seek payment deferrals, full or partial waiver of rent and/or charges, or set-off of any future amounts owed using the amounts they have already paid. There is currently no clear answer on whether tenants are allowed to take such measures under the lease or based on the law, and if they are allowed, on what legal grounds. To seek clarity on this, tenant lobby groups are trying to push legal initiatives to make rent suspension possible during this health crisis. However, no law pertaining to this has been adopted yet.
Strategic assessment. To define your strategy on whether or not you, as a tenant, can deviate from your payment obligations under the lease, or how you, as a landlord, should react to such tenant requests (or unilateral decision), it is important to fully understand the situation you are in. The following questions can help you assess the situation you are in:
- Does the lease contain specific provisions or exclusions that allocate the risk of force majeure, fait du prince, the (legal) loss of the leased premises and/or the inability to operate the leased premises to a specific party?
- Is the tenant forced by law or government orders to close its premises because of the COVID-19 measures?
- Do I as a tenant have an obligation to operate the leased premises?
- Are the leased premises part of a larger leased complex, shopping centre or larger store?
- Is there an obligation to insure against business interruption or loss of rent? Is this particular (health crisis) case covered by my loss-of-rent coverage?
- What is the financial situation of my counterparty and the group to which it belongs? Can the measures that I take push my counterparty into a financially precarious situation?
- What governmental support measures are or are likely to become available to me and my counterparty?
- What type of security is provided under the lease? Are there any guarantors, and if so, do they need to be notified or involved in any concession arrangements that we (landlord and tenant) have reached?
- Are there certain financial incentives that my tenant is entitled to in the future (e.g. rent incentives)? Is it feasible to make them applicable during the lockdown period to improve my tenant's liquidity position?
- Can concessions be made under the facility agreements, or, do I, as landlord, need to seek investor's approval of these concessions?
- If I, the landlord, make certain concessions to one tenant, how will I react to other tenants who become aware of those concessions? How do I avoid in the first place that other tenants become aware of such concessions?
Scenario 1: Tenant is not forced to close
If a tenant is not forced to close its business and if the lease remains in force, the following legal concepts can be invoked by tenants.
Force majeure. Courts rarely consider a payment obligation to be an obligation that is impossible to carry out, except in very specific circumstances. Therefore, invoking force majeure (cf. supra) successfully (i.e., by proving the existence of the force majeure elements) will not be easy. Moreover, in its legislation (still to be published) irrefutably qualifying the effects of COVID-19 between 18 March 2020 until 5 April 2020 (subject to extension) and the government's response thereto as an event of force majeure, the federal government excludes explicitly payment obligations and even refers to rent in particular.
In addition, one can argue that a downturn in turnover caused by an external factor/event (such as COVID-19) is an operational risk each party faces when doing business. This risk cannot be shifted entirely to the landlord. A landlord also does not benefit from any increase in turnover in good economic times either.
A tenant who is not forced to close its business will usually not be able to invoke force majeure to suspend its payment obligations for reasons of the COVID-19 outbreak and/or the government-imposed measures. This applies regardless of whether the tenant has valid reasons to close its business (such as avoiding financial losses, protecting itself, its employees or its customers).
Hardship, abuse of rights, and good faith. Belgian courts have traditionally rejected the doctrine of hardship, pursuant to which agreements should be adapted when unforeseen circumstances render the performance for one of the parties more onerous (rather than impossible, which is the case for force majeure). Instead, some lower courts have applied in their ruling the concept of good faith and the obligation to not abuse one's contractual rights to obtain similar effects.
A party will thus be considered to have abused its right if it exercises its right in a way that goes manifestly beyond the normal limits of how a normal and prudent tenant or landlord would have acted in the same circumstances. If a party is found to have abused its right, the judge will usually reduce to a normal level the scope of that right or will order the wrongful party to remedy the damage suffered by the aggrieved person who suffered the abuse of the right in question.
An example of this ruling, which concerns a case of 3 February 2014, was rendered by the Court of Ghent. The Court held that a creditor abused his right to exercise forced execution when he relentlessly insisted on the performance of the agreement and refused every amendment or renegotiation of the agreement while the obligations of the debtor became considerably more onerous because of unforeseen circumstances.
Support measures. The overall assessment of the situation (including whether there is force majeure) must also take into account the federal and regional support measures that are—and will be—granted to tenants and landlords.
Grace periods (Art. 1244 Belgian Civil Code). Notwithstanding any contractual provision, Belgian courts may grant payment deferrals and suspend actions seeking payment collection, depending on the situation of the parties and taking into account whether any payment deferrals have already been granted (by a judicial body or the landlord). When exercising such discretion, courts must do so with great caution and grant deferrals only if it is strictly necessary—not because it is convenient for any party.
Economic/relational risk. Consider what Queen Elizabeth II said in her speech on 5 April 2020 when deciding which course of action to take: "I hope in the years to come everyone will be able to take pride in how they responded to this challenge, ...". When you exercise your rights (even if you are fully entitled to do so contractually), consider the future relationship with your counterparty. Enforcing all your rights without leaving any window for discussion in difficult times can backfire, at least in some cases, on the future relationship or harm your reputation on the market. It could push your counterparty into bankruptcy or judicial reorganization proceedings. Having an insolvent tenant or landlord will not benefit any party.
Scenario 2. Forced closure of the business
This is when the leased premises are ordered to close (because of an external reason, i.e., government order). In the absence of any contractual risk allocation between the parties, some argue that there is a temporary (legal) loss of the leased premises due to unforeseen and inevitable circumstances that are not attributable to the parties (fait du prince, which for lease agreements can be based on article 1722 Belgian Civil code).
If there is a fait du prince event, the obligations of the parties in a reciprocal agreement such a lease are in principle suspended for the duration of the fait du prince, provided that the situation is only temporary, and the parties do not owe each other any compensation. If the fait du prince becomes permanent, the lease terminates. Although much will depend on the facts at hand, tenants who must close their doors according to government orders are more likely able to succeed in seeking suspension of their payment obligations than tenants who are not forced to close, but there is no guarantee to this.
Position BVS/UPSI. The real estate trade association (BVS/UPSI) recommends to its members who are retail property owners to waive half of the rent for two months and to grant reasonable payment deferrals.
Possibility to write down trade receivables. If you are confronted with unpaid trade receivables, note that the COVID-19 crisis constitutes an exceptional circumstance that justifies the write-downs of trade receivables (see Circular letter 2020/C/45 of 23 March 2020).
What about other rights in rem?
Parties quite often opt to deliberately structure their relationship through rights in rem rather than through a lease for the purpose of avoiding the mandatory provisions of the Retail Lease Act. This enables owners to have more certainty on the future cash flows (i.e., avoiding the tenant's right to have the rent reviewed every three years) and the term of the agreement (i.e., no break every three years and no right of renewal). What is stated earlier above in relation to leases cannot always be applied to other rights in rem. For an long lease, for example, and unless otherwise agreed upon, the canon (i.e., the amount to be paid) has an abstract character. This means that the canon remains due and payable even if the leaseholder loses the (temporary) enjoyment of the premises. Only if the loss of enjoyment continues for five (5) consecutive years will the leaseholder be able to seek exemption from payment.
I need the involvement of a notary for my transaction. Is he or she still available to assist me?
Notaries remain available at this time for all urgent actions. Urgent actions are operations that have an immediate economic impact on companies. These types of operations include capital increases and decreases, a contribution of assets, mergers, takeovers, demergers and transformations. All transactions that must be carried out within a certain period of time that is about to expire will in principle be accepted also. Release and creation of security are also still possible.
Setting up a new company, creating a base deed, creating new rights in rem or passing an authentic sales deed will usually not be considered an urgent action, but they can be. For example, a distressed sale is considered urgent. Notaries still require the physical presence or physical representation of the parties to the deed. Remote execution of a deed (for example, through video conference, which is now allowed in France) is not officially possible yet in Belgium. But some notaries have worked out certain options to make remote deed-execution possible. The order of notaries is currently working out a plan to enable this.
This should not prevent the parties from validly concluding new rights in rem or a sale through a private agreement, however, whereby the notarization will take place after the lockdown period (i.e., to make such private agreement effective towards third parties). If you want to acquire the property through a new company, it is also not required that this company be created at the time that the private agreement is signed. It is possible to sign an agreement on behalf of a company that still needs to be incorporated. When doing so, it is important to carefully draft this part of the agreement to avoid a double sale (which can trigger the payment of registration duties twice).
Do I need a physical closing for a share deal?
No. It is perfectly possible to organize a remote closing of a share deal, but some practical aspects will need to be taken up as post-closing obligations (e.g., those that relate to the physical handover of certain documents, such as the data room DVDs/USBs, shareholders' register, originals, etc.).
Stibbe has an electronic platform that allows our clients and their counterparty to sign any document digitally using their electronic identity card or the itsme application.
Does COVID-19 qualify as a material adverse change?
Material adverse change (MAC) clauses (also known as material adverse event (MAE) clauses) are usually included in deal agreements if the signing and closing of the transaction does not occur on the same date. There are various ways to structure a MAC clause. They are more commonly structured as a condition precedent or condition subsequent. If it is structured as a condition precedent, the agreement will not become effective between the parties when the MAC occurs. If it is structured as a condition subsequent, the agreement will automatically terminate once the MAC occurs. MAC clauses can also be structured in the form of a representation or warranty, in which case the purchaser is entitled to an indemnification or recovery of harm or loss if a MAC occurs.
Whether COVID-19 qualifies as a MAC must be considered on a case-by-case basis and will depend on the contractual wording and specific circumstances involved. MAC clauses can come in all forms. Some are very narrow (i.e., they concern the physical destruction of the property), while others are very broad (e.g., an event "adversely affecting the value of the shares and/or the financial position of the target"). To limit disputes about a MAC, it is important to use (and write out in the clause) a clear and objective materiality threshold (e.g., EBITDA decrease by a certain %) and to set out a clear procedure for establishing whether there is a MAC (e.g., assessment by a third party). It is also important to verify whether change of law and economic circumstances has not been expressly carved out by the agreement. Although a broad MAC clause can give you an easy reason to invoke that a material adverse event has occurred, it must be noted that case-law is usually reluctant to accept the actual occurrence of a material adverse event if the MAC clause invoked is defined or worded too broadly.
Should you have any questions or concerns regarding any of the above topics, we would be more than happy to help you.
This article provides some general insights on different legal questions. These insights do not constitute legal advice and may not be relied upon as if they were legal advice. The outcome of any legal analysis will strongly depend both on the specific facts and circumstances of each case and on the particularities of the sector and legal relationship involved. Our legal experts in the various domains concerned are available to assist you with the analysis of your questions and provide specific advice tailored to your case and circumstances.