Autor: Lisa Fortmüller

The SARS-CoV2 (“Coronavirus”) epidemic might lead to numerous problems in performance of construction works agreements.

Our clients point to conflicting signals coming from the market:

– in some investment projects (e.g. large construction projects), investors insist that works should be continued, while construction companies would like to modify schedules, realizing that certain limitations will arise from distorted supply chains and lower availability of subcontractors/employees, e.g. as a result of: (i) a large number of medical leaves (estimates indicate that this might concern 10-20% of employees); and (ii) closing of the Ukrainian border;

– in other projects (e.g. renovation or office fit-out projects at levels that are partially occupied by tenants), construction companies might be willing to perform works but entities occupying the areas intended for renovation ask for the suspension of works due to guidelines issued by the Chief Sanitary Inspectorate, so that they don’t need to share space with the contractors’ employees.

In view of the Regulation of the Minister of Health of March 13, 2020, announcing the state of epidemic threat in Poland (the “Regulation”), and the fact that it does not specify any restrictions related to construction works, it might be difficult or even (in some cases) impossible to invoke a force majeure event.

Under specific (individually assessed) circumstances, however, it may be justified to claim that we are experiencing: (i) a force majeure event; and (ii) extraordinary circumstances that make it possible to amend the agreements that have already been executed (rebus sic stantibus). This situation gives rise to a number of questions and doubts related to further implementation of construction projects.

It is important now to analyze construction agreements in order to examine the possibility to suspend works and change schedules, as well as to assess the impact of the adopted solutions on costs, with a strong focus on arguments related to potential emergence of force majeure.

Force majeure

Construction works agreements often include “force majeure clauses” with specific definitions. We need to keep in mind that anyone seeking to invoke force majeure will be obliged to prove: (i) that the current situation is categorized as force majeure in light of a given agreement; and (ii) that the current situation made it impossible to perform an obligation in accordance with the agreement for objective reasons. Not every single non-performance or improper performance of an obligation will be justified.
Only non-performance or improper performance resulting from factors that none of the parties could predict or influence can be excused.

It might turn out to be insufficient to evidence the above on the basis of contractual provisions and the Regulation. In order to modify the project schedule, a party to an agreement will need to provide a broader range of arguments. It will be necessary to embark on claim management processes.

Entities whose agreements do not contain force majeure clauses are in a completely different situation. They will not be able to “automatically” use contractual provisions, and their defense against the creditor’s claims related to non-performance or improper performance of an obligation (article 471 of the Civil Code) will need to be based on challenging the existence of: (i) fault on part of the debtor; or (ii) damage on part of the creditor. The agreement’s provisions will also play a vital role here. However, instead of the existence of force majeure (which will be examined by a competent court on the basis of applicable laws), the key issue will be to determine whether an entity invoking force majeure bears fault-based liability or whether its liability has been defined otherwise.

A special situation will occur in infrastructure projects and others based on FIDIC, where invoking force majeure might not lead to the fulfillment of the contractors’ goals. In case there are no binding crisis regulations that limit construction activities, contractors will be aware of additional difficulties, potential delays or increased costs, and will (in order to continue works) seek a reliable basis for submission of claims, especially ones for extension of deadlines and for Costs. It needs to be noted here that FIDIC offers a range of regulations that (when applied correctly) might produce better results than attempts at invoking force majeure.

Contractual penalties

In case the parties have included a contractual penalty for non-performance or improper performance, the creditor will be exempt (as a general rule) from the obligation to prove that it has suffered any damage.

The crucial issue is to check whether the agreement stipulates that the creditor is entitled to demand a contractual penalty irrespective of whether the debtor is at fault for untimely performance of an obligation, i.e. whether the delay is culpable or not.

If the parties link the debtor’s obligation to pay a contractual penalty with a culpable delay, courts (after determining that the current circumstances indeed affect the performance of obligations) will tend to release debtors from liability due to lack of their fault.

In case a contractual penalty applies to a non-culpable delay, it will not (as a general rule) cover a force majeure event, unless the agreement clearly specifies that the debtor’s liability has been extended to include force majeure. Needless to say, in case of any litigation, item 1 above will apply, i.e. it will be necessary to prove the emergence of force majeure and its impact on the delay.

Contractual amendments

The Coronavirus epidemic can also serve as a reason for which parties to an executed agreement will need to modify its contents. Such amendments could be introduced through negotiations of contractual provisions or litigation (in case of failure to reach an amicable solution).

If, due to an extraordinary change of circumstances, the performance of an obligation involves excessive difficulties or exposes one of the parties to a substantial loss (which was not expected by the parties when entering into the agreement), the court may – having considered the parties’ interests in accordance with the principles of social conduct – determine the manner in which the obligation will be performed, define the value of a payment due, or even terminate the agreement.

Given the current version of the Regulation, invoking a clause that permits amendments to the agreement in case of a fundamental change of circumstances (rebus sic stantibus) will pose a challenge in which an adequate technical and legal analysis will play the key role.

Since a court’s interference with the contents of the agreement might be extensive (e.g. the court will be able to modify the contractual provisions related to the fee, scope of works and project completion date), we need to keep in mind that such court-enforced amendments to the agreement can only take place when the performance/payment is not due yet (meaning that such lawsuit has to be filed before the maturity date) and specific criteria have been met, incl. a fundamental change of circumstances (which was not expected by the parties upon agreement execution) has occurred and excessive difficulties (that have a cause-and-effect relation with non-performance) in performance of an obligation have emerged, or there is a threat of a substantial loss for one of the parties to the agreement.

Judicial practice shows that in relations between business entities, it is relatively difficult to get courts to modify contractual provisions.

Given the fact that the situation might keep changing rapidly, an entity wishing to have an agreement modified by court needs to start by submitting a motion for interim relief (limited operations of courts in relation to the current state of epidemic threat do not apply to interim reliefs; motions in that respect are examined at closed-door sessions), followed by a statement of claim which needs to be filed within two weeks. The list of interim relief forms is non-exhaustive; for instance, the court might forbid the creditor to charge contractual penalties or set them off against the fee specified in the agreement.

Recommended actions:

1. Analysis of construction works agreements in terms of: (i) force majeure; (ii) contractual penalties.
2. Monitoring the submission of interim relief motions with competent courts.
3. Monitoring notices/letters from business partners – potential pre-trial notices with demands related to modification of contractual obligations.

Below you will find detailed information and recommendations related to the state of epidemic threat for the real estate industry, which took effect on March 14.

We can already see clear impacts on our sector, as listed below.

I. Some tenants of commercial developments cannot run their operations; this applies to the following types of businesses:

1. Restaurants, canteens, cafés, fitness clubs, movie theaters, conference centers, clubs and art galleries;
2. Entities operating in the retail (clothes, textiles, shoes, furniture, lighting, home electronics, household appliances, bookstores), food service and entertainment industry.

II. Tenants expect that they won’t have to pay the rent, service charges and marketing fees for the period over which their premises are closed.

Comments:

The following scenarios are possible here, depending on specific circumstances and provisions included in lease agreements:

1. The tenant proves that a force majeure event has occurred, and is not obliged to pay the rent or any other fees;
2. The tenant does not pay the rent but continues to pay the service charges due to the fact that it is necessary to ensure continued operations of the building/complex, security services for the closed shop, etc.;
3. The tenant submits a rent reduction statement covering the period of restrictions arising from the Regulation of the Minister of Health, dated March 13, 2020, on declaration of the state of an epidemic threat in Poland; in such statement, the tenant refers to the premises’ legal defects (in case the premises are located in a retail facility of over 2,000 m2);
4. The above combined (e.g. discounts);
5. None of the above – depending on specific circumstances.

We need to keep in mind that in case of externally financed developments (esp. bank loans and bonds), any rent/service charge discount requires the financing entity’s consent or back-transfer.

Recommended actions:

1. Analysis of lease agreements in that respect, especially in terms of:
   (i) provisions related to force majeure;
   (ii) the type of the tenant’s operations (this might be debatable in case of chain stores that combine different types of operations, as well as those stores whose operations might turn out to be crucial from the point of view of panic prevention and access to necessary resources);
   (iii) any provisions specifying that tenants are not exempt from the obligation to make payments in case a building/lease object gets closed due to a sanitary threat, force majeure, etc.);
   (iv) provisions related to liability arising from warranty that covers the premises’ legal defects;
2. Monitoring notices/letters from tenants (some tenants that are not even covered by retail restrictions have already sought to invoke force majeure);
3. Defining the actual group of tenants covered by the restrictions (the Regulation makes a reference to PKD [Polish Classification of Business Activity] and the criterion of “main activity”);
4. Determining a unified approach to all tenants covered by the restrictions (uniform practice).

III. Litigation-related actions taken by tenants

Tenants might embark on litigation in order to secure changes to their obligations arising from lease agreements, especially suspension, reduction or deferral of payments of the rent, service charges and other fees.

Comments:

The following scenarios are possible here, depending on specific circumstances:

1. Lawsuit for establishing the existence of force majeure, along with motion for interim relief:
   – filing a lawsuit for establishing the existence of a force majeure event, as a result of which the tenant might hold specific rights defined in the lease agreement, especially the right not to pay the rent/other fees or the right to terminate the agreement;
   – as a consequence of force majeure, it is not possible to use the lease object, meaning that the principle of equal consideration of interests is not respected (which, in itself, might serve as the basis for voidance of payment obligations);
   – alternatively, the tenant might file a lawsuit for establishing that rent was effectively reduced as a result of submission of a relevant notice based on the premises’ legal defects (such objection can also be raised in case the lessor files a lawsuit for payment covering the period of retail restrictions);
   – in order to quickly arrive at the desired results, such lawsuit may be combined with a motion for interim relief involving temporary measures that regulate the legal relation between the tenant and the lessor (e.g. an obligation to pay the rent/other fees into a court deposit);
   – it is also possible to submit a motion for interim relief before filing a lawsuit; limited operations of courts in relation to the current state of epidemic threat do not apply to interim reliefs; motions in that respect are examined at closed-door sessions (which continue to be held without any limitations as of now);
   – within two weeks of securing an interim relief, the tenant is obliged to file a lawsuit with a court (otherwise the interim relief is lost).
2. Lawsuit for amendments to legal relation due to fundamental change of circumstances (rebus sic stantibus), along with motion for interim relief:
   – a fundamental/extraordinary change of circumstances (i.e. implementation of the state of epidemic threat), which renders it impossible to use the lease object, might serve as the basis for a lawsuit aimed at amending the legal relation between the lessor and the tenant;
   – the tenant could seek exemption from the obligation to pay the rent for a given period, or a modification of its value; each situation would be examined separately; in such cases, the court is in no way bound by the requests specified in the statement of claim;
   – the court is obliged to balance the parties’ interests, meaning that the tenant would be more likely to get a favorable ruling if there was a higher risk of: (a) lack of the possibility to fulfill a specific obligation in the future (e.g. the lessor is unable to deliver the lease object again / the tenant cannot run its business operations); or (b) considerable losses on the tenant’s part;
   – in practice, the above means that such option would be of interest to tenants that are at the verge of insolvency;
   – the aforesaid remarks concerning interim relief apply to this situation, as well.
3. Other potential litigation-related actions resulting from lease agreements.

Recommended actions:

1. Analysis of lease agreements in that respect, especially in terms of other litigation-related actions which might be taken by tenants;
2. Monitoring the submission of interim relief motions with competent courts. Jurisdiction might be determined on the basis of contractual provisions or applicable legal regulations;
3. Monitoring notices/letters from tenants – potential pre-trial notices with demands related to modification of contractual obligations.

IV. Limitations in the operations of other tenants (which are not covered by the retail restrictions)

Comments:

When some tenants suspend their operations, others will seek to limit their activities, request a reduction of their rent/other fees, and pursue contractual penalties for suspended/interrupted operations.

Recommended actions:

1. Analysis of lease agreements signed by tenants that are not covered by the restriction (in terms of force majeure, the type of the tenant’s operations, and clauses concerning warranties, the minimum required occupancy rate, the presence of specific other tenants or sectors, and footfall/turnover targets);
2. Monitoring notices/letters from tenants that are not covered by the restriction; monitoring their operations;
3. Defining the actual group of tenants covered by the restrictions (the Regulation makes a reference to PKD [Polish Classification of Business Activity] and the criterion of “main activity”);
4. Determining a unified approach to all tenants covered by the restrictions (uniform practice).

V. Impact of the restriction on the dates specified in pre-lease agreements, relocations, etc.

Comments:

The restriction of business operations, imposed on selected tenants, means that it is not possible to keep opening dates. This has a considerable impact on other dates, e.g. early access or handover for the purpose of works performance.

Recommended actions:

1. Analysis of pre-lease agreements, relocations, etc. (in terms of force majeure, setting/calculation of deadlines, notices, penalties for untimely handover, penalties for failure to embark on operations, as well as clauses concerning the occupancy rate, the presence of specific other tenants or sectors, and footfall/turnover targets);
2. Monitoring notices/letters from tenants that are not covered by the restriction; monitoring their operations;
3. Defining the actual group of tenants covered by the restrictions (the Regulation makes a reference to PKD [Polish Classification of Business Activity] and the criterion of “main activity”);
4. Determining a unified approach to all tenants covered by the restrictions (uniform practice).

VI. Limitation of services provided by lessors for their buildings due to some tenants’ force majeure-related suspension of operations

Comments:

If the lessor does not regard the restriction of the tenants’ activities as a force majeure event (that exempts them from the obligation to pay the rent and/or service charges), it will be difficult for the lessor to invoke force majeure when trying to justify the limitation of services provided for a given building.

Recommended actions:

1. Analysis of service provision/maintenance agreements (in terms of force majeure, contractual termination for the so-called “just cause,” and temporary suspension of services);
2. Coordination of the aforesaid activities with credit facility agreements, terms of the bond issue, external loans and lease agreements – especially in terms of performance of services for operating tenants (e.g. grocery stores), consequences of temporary service interruptions, etc.;
3. Coordination of the aforesaid activities with insurance conditions – in order to avoid a loss of insurance coverage due to limited services.

VII. Considering the need for an extended scope of services for buildings, if justified by the epidemiological situation, e.g. additional disinfection and cleaning services

Comments:

The question arises whether it is possible to settle increased costs as part of the service charge. We need to keep in mind that grocery stores (for example), which are facing onslaught of customers and can continue their operations, often have a service charge cap specified in their lease agreements. Tenants that are obliged to limit their operations might not want to pay higher service costs that allow other tenants to continue their operations.

Recommended actions:

1. Analysis of lease agreements (in terms of service charge settlements and caps/other limits);
2. Coordination of the aforesaid activities with credit facility agreements, terms of the bond issue and external loans – e.g. with respect to the operating budget communicated to banks, bondholders and lenders;
3. Coordination of the aforesaid activities with insurance conditions – in order to avoid a loss of insurance coverage due to limited services.

VIII. Considering the need to cancel parking fees (and open the gates)

Comments:

If justified by the epidemiological situation (e.g. in order to limit the customers’ contact with parking machines), it might be necessary to cancel parking fees.

Recommended actions:

1. Analysis of lease agreements (in terms of parking lot-related settlements);
2. Coordination of the aforesaid activities with credit facility agreements, terms of the bond issue and external loans – with respect to the operating budget communicated to banks, bondholders and lenders;
3. Analysis of service provision/maintenance agreements in terms of parking fee cancellations.

IX. Considering setting a maximum number of customers in a shop at a time

Comments:

The question arises as to whether to adopt a rule based on which only a specific number of people can be inside a store at the same time. The aim is to minimize the risk of contact (if justified by the epidemiological situation). Such limitation can be introduced as part of a tenant’s internal policy (e.g. a grocery store or a pharmacy) or by competent authorities (at a later date).

Recommended actions:

1. Analysis of lease agreements in terms of the possibility to extend the scope of services and payments for additional services (e.g. access coordination and extra security services);
2. Analysis of lease agreements (in terms of service charge settlements and caps/other limits).

X. Impact of lack of rent/service charge payments on external financing (credit facility agreements, terms of the bond issue, external loans)

Comments:

Irrespective of how long the current epidemiological situation persists, the impact on external financing will be unfavorable.

Recommended actions:

1. Analysis of credit facility agreements and terms of the bond issue in light of:
   – existing obligations (principal and interest);
   – indicators (esp. DSCR);
   – possibility to apply a higher margin, request additional security or terminate financing (e.g. material adverse change or amendments to the Banking Law);
   – updates of operating budgets;
2. Considering asking the financing entities for a grace period for repayment of interest/principal, or preclusion of the obligation to reach specific ratios;
3. Considering asking the financing entities to mobilize reserves (e.g. blocked resources, rent surplus, CapEx/supplementary accounts);
4. Considering asking the financing entities to activate special tranches that allow buildings/complexes to operate as usual under extraordinary circumstances;
5. Considering asking for a standstill agreement in case of a crisis.

XI. Impact of the epidemiological situation on the executed preliminary property sale agreements

Comments:

Given the epidemiological situation and the resulting difficulties in operations of commercial facilities (incl. the risk that new lease agreements will not take effect on the original dates), the execution of final agreements might be delayed. Moreover, in view of the above, purchasers (and also sellers – in certain cases) might wish to rescind preliminary agreements.

Recommended actions:

Analysis of the executed preliminary agreements in terms of:

1. performance of obligations related to turnover levels, handover/acceptance or start of operations (given the fact that some tenants are unable to open their stores);
2. possibility to adjust the price;
3. possibility to change the conditions (e.g. extend deadlines);
4. possibility to terminate or rescind agreements, incl. with respect to refundable and non-refundable advances, the costs incurred (e.g. the costs of legal and technical due diligence) and financing arrangements.

XII. Impact of the epidemiological situation on the executed sale agreements that entail adjustment of the sale price on the basis of turnover or profits (incl. any reconciliation and earn-out clauses).

Comments:

In case of rent reduction/suspension and a significant drop in turnover, it might be difficult to determine the prices, especially if they are based on revenue generated by a given building.

Recommended actions:

Analysis of the executed preliminary agreements in terms of:

1. impact on price settlement (especially important for share deals) and adjustment;
2. impact of the extraordinary situation on earn-out and reconciliation clauses (these clauses do not take into account reduced turnover or rent as a result of extraordinary situations);
3. possibility to change the conditions (e.g. extend deadlines for targets);
4. possibility to terminate or rescind agreements, incl. with respect to refundable and non-refundable advances, the costs incurred (e.g. the costs of legal and technical due diligence) and financing arrangements.

XIII. Impact of the epidemiological situation on insurance policies

Comments:

Many buildings are (due to banking conditions) covered by rent (and/or service charge) loss insurance. Most insurers will refuse to make payments due to the extraordinary situation. It is worth bearing in mind that in case of external financing, insurance claims have been transferred (conditionally or unconditionally) to financing entities.

Recommended actions:

1. Analysis of the executed insurance agreements (general terms and conditions) in light of the possibility to get insurance compensation for lost income;
2. Analysis of the executed credit facility agreements in terms of activation of the insurance procedure (whether an insurance claim has been transferred to the financing entity; whether such transfer was conditional or unconditional; whether the conditions have been met; how the relevant procedure is applied, etc.).

XIV. Impact of the epidemiological situation on construction agreements (general contractor, fit-out, etc.).

Comments:

General contractors and other contractors of buildings or fit-out works are already saying that they will not be able to meet deadlines or budgets for reasons beyond their control. Delivery dates scheduled for buildings and lease objects might not be met.

Recommended actions:

1. Analysis of agreements with contractors in terms of force majeure and changes to deadlines/budgets;
2. Analysis of related agreements (credit facility agreements, terms of the bond issue, loan agreements) in terms of dates and activation of additional tranches.

In case of any questions or doubts, we are available to address them at any time, including weekends and outside typical business hours (if need be, we will also involve experts in labor law and tax law).

Below you will find contact details of key real estate team members:

Michal Wielhorski
+48 605 911 303
michal.wielhorski@actlegal-bsww.com

Marek Wojnar
+48 601 379 610
marek.wojnar@actlegal-bsww.com

Marta Kosiedowska
+48 605 107 997
marta.kosiedowska@actlegal-bsww.com

Alicja Sołtyszewska
+48 663 004 333
alicja.soltyszewska@actlegal-bsww.com

Małgorzata Wąsowska
+48 694 326 212
malgorzata.wasowska@actlegal-bsww.com

Piotr Pośnik
+48 607 880 133
piotr.posnik@actlegal-bsww.com

Katarzyna Marzec
+48 603 112 225
katarzyna.marzec@actlegal-bsww.com

Magdalena Banaszczyk-Głowacka
+48 503 575 012
magdalena.banaszczyk@actlegal-bsww.com

Michał Sołtyszewski
+48 604 541 101
michal.soltyszewski@actlegal-bsww.com

Izabela Żmijewska
+48 603 300 382
izabela.zmijewska@actlegal-bsww.com

Mateusz Prokopiuk
+48 606 383 247
mateusz.prokopiuk@actlegal-bsww.com

Marta Łobzowska
+48 607 144 121
marta.lobzowska@actlegal-bsww.com

Marcelina Daszkiewicz
+48 665 667 670
marcelina.daszkiewicz@actlegal-bsww.com

Aneta Gierzyńska
+48 667 664 224
aneta.gierzynska@actlegal-bsww.com