Corona pandemic can be classified as force majeure

In a decree issued by the Federal Ministry of Construction on 23.03.2020, the federal government announced that the corona pandemic can be classified as force majeure in individual cases for public buildings. At the same time, however, it intends to continue with its construction projects and only interrupt them when official measures come into force, if these measures make further construction activities impossible, such as the construction of a new building, for example:

– quarantine of most construction workers or

– decree of prohibition to enter.

This is stated in a decree of the Federal Ministry of Building and Construction from Monday. The addressee is the Federal Office for Building and Regional Planning.

Force majeure possible in individual cases

In the letter, which was addressed to the Federal Office for Building and Regional Planning, the ministry gives advice on how to deal with process disturbances in construction. According to this, the Corona pandemic is in principle suitable to trigger the facts of force majeure according to § 6 Para. 2 No. 1 VOB/B (German Construction Contract Procedures). ‘Force majeure usually means an unforeseen event which cannot be averted economically even by exercising the utmost care.’

The ministry does not see these strict requirements as generally given. The Ministry recommends that the subordinate authorities check in each individual case why a company is not efficient. Exemplary reasons are:

– that the authorities have quarantined a large number of employees,

– no replacement can be found,

– Building material is missing or

– that workers can no longer come to the construction site due to travel restrictions.

The Ministry of Construction is thus responding to the demands of the building associations, whose interest is to protect defaulting companies from recourse claims by clients.

In case of doubt for the construction company

Doubts may remain during the examination. The authorities are required to ‘handle the statements required by the contractor in individual cases with a sense of proportion, pragmatism and with a view to the overall situation’. With the letter, the Ministry of Construction also took into account the demand of the construction industry for fee payments and thus for securing liquidity. Invoices are to be checked and paid immediately, the decree warns.

COVID-19 epidemic – practical guide for the real estate sector

Below you will find information and recommendations on the status of the epidemic threat to the real estate industry due to the regulations and decrees that have now come into force.

1. Tenants and leaseholders of commercial (and also office) properties are unable to conduct their business

The officially ordered closures due to the corona virus are probably to be judged as extraordinary coincidences in the sense of §§ 1104f ABGB (Austrian Civil Code), which leads to the need to clarify whether the owners of the property are exempted from paying the interest (including ancillary charges such as operating costs) or can demand a reduction corresponding to the impairment, even if the owner is not at fault. Although there is no relevant case law on an exactly comparable case, § 1104 ABGB expressly mentions, for example, epidemics as an extraordinary coincidence; the fulfilment of this definition has been assumed by case law, among other things, also in the case of an officially decreed ban on product processing in the leased company. In addition, the tenant may under certain circumstances terminate the tenancy agreement with immediate effect for good cause, whereby a certain minimum period of uselessness may be required. In the event of only partial unusability (if only one part of the business is affected) there is probably a claim to a corresponding reduction in rent.

The provisions on the legal consequences of the unusability of the existing property due to extraordinary coincidences are not mandatory law, so that deviating agreements are possible and the contractual agreement is therefore of particular importance.

On the other hand, a mere reduction in customer frequency without official closure or other causes inherent in the inventory item is generally assigned to the sphere of the property owner, unless a specific business transaction has been guaranteed or the contract has been used as the basis for the transaction. Here, the contractual agreement is of major importance.

In addition to the purely legal assessment, in the current phase the future procedure for the continuation of desired inventory relationships, e.g. dissolution of unwanted existing relationships and, if necessary, appropriate agreements with the existing owners must be made.

It is recommended that you analyse the rental and lease agreements, especially with regard to

  • Definition of the actual group of tenants covered by the restrictions;
  • Provisions relating to force majeure;
  • The nature of the lessee/tenant’s business activity (maintenance of the necessary resources for the population);
  • Provisions relating to liability under the warranty covering the defects of title of the building;
  • New regulations/measures by the government, establishing a uniform approach for all tenants covered by the restrictions (uniform practice);
  • Monitoring notices/letters from tenants;
  • Analysis of the leases, in particular with regard to other process-related measures that could be taken by the tenants;
  • Monitoring the filing of applications for interim relief with the competent courts. Jurisdiction could be determined on the basis of contractual provisions or applicable legal regulations;
  • Monitoring of notices/letters from tenants – potential pre-litigation announcements with requests for modification of contractual obligations.

2. The effect of the restriction on the dates laid down in stock contracts, removals, etc:

The restriction of business activities means that it is not possible to meet the opening or transfer dates. This also has a significant impact on other deadlines, e.g. early access or handover for the purpose of carrying out the work.

Recommended measures:

  • Analysis of contracts with regard to force majeure, setting or calculating deadlines, terminations, penalties for late delivery, penalties for not starting operations, and clauses on occupancy rates, the presence of certain other tenants or sectors and pedestrian/turnover targets;
  • Monitoring of notices/letters from tenants/leaseholders not affected by the restriction; monitoring of their activities;
  • Definition of the actual group of tenants covered by the restrictions;
  • Establishing a uniform approach for all tenants covered by the restrictions (uniform practice).

3. Limitation of the services provided by the landlords for their buildings due to the suspension of the tenants’ operations due to force majeure

Recommended measures:

  • Analysis of service/maintenance agreements (with regard to force majeure, “force majeure” contract termination and temporary suspension of services);
  • Coordination of the above activities with credit lines, terms of the bond issue, external loans and rental contracts/leases – in particular with regard to the provision of services to building operators (e.g. food stores), consequences of temporary service interruptions, etc;
  • Coordination of the aforementioned activities with the insurance conditions – in order to avoid loss of insurance cover due to restricted services;
  • Taking into account the need for an extended scope of services for buildings if the epidemiological situation justifies it, e.g. additional disinfection and cleaning services;Dealing with tenants/tenants/ owners who are obliged to restrict their business and therefore do not wish to pay higher service costs that would allow other tenants/owners / tenants to continue their business;
  • Analysis of the rental contracts (in terms of service charge settlements and ceilings/other restrictions);
  • Coordination of the above activities with the credit facility agreements, terms of the bond issue and external loans – e.g. in relation to the operating budget communicated to banks, bondholders and lenders;
  • Coordination of the above activities with the insurance conditions – to avoid loss of insurance cover due to limited benefits.

4. Effects of the lack of rental/service fee payments on external financing (credit framework agreements, terms of the bond issue, external loans)

Regardless of how long the current epidemiological situation lasts, the impact on external funding will be unfavourable.

Recommended measures:

  • Analysis of the credit facility arrangements and the terms of the bond issue with a view to existing commitments (principal and interest);
  • Indicators (especially debt service coverage ratio);
  • The possibility of applying a higher margin, requiring additional collateral or terminating the financing (e.g. significant adverse change or amendments to the Banking Act);
  • Updates of the operating budgets;
  • Consideration of asking the financing institutions for a grace period for repayment of interest/principal or to exclude the obligation to achieve certain ratios;

5. Impact of the epidemiological situation on the executed provisional land sale contracts

In view of the epidemiological situation and the resulting difficulties in operating commercial facilities (including the risk that new leases will not enter into force on the original dates), the implementation of the final agreements may be delayed. In addition, in view of the above, the purchaser (and in certain cases the seller) may wish to terminate the preliminary agreements or withdraw from the contract.

Recommended actions:

Analysis of the executed preliminary agreements with regard to:

  • Fulfilment of obligations in terms of turnover, handover/takeover or start of operations (in view of the fact that some lessees cannot open their shops);
  • The possibility of adjusting prices;
  • The possibility of changing conditions (e.g. extension of deadlines);
  • The possibility of terminating or revoking agreements, including those relating to repayable and non-repayable advances, the costs incurred (e.g. legal and technical due diligence costs) and the financing arrangements.

6. The impact of the epidemiological situation on the sales contracts executed, which entails an adjustment of the sales price on the basis of turnover or profit

In the event of a reduction/suspension of rent and a significant decrease in turnover, it could be difficult to determine prices, especially if they are based on the income of a specific building.

Recommended actions:

Analysis of executed contracts in terms of:

  • Effects on price settlement (particularly important for share transactions) and adjustment;
  • Impact of the extraordinary situation on the earn-out and reconciliation clauses (these clauses do not take into account the reduced turnover or rent as a result of extraordinary situations);
  • Possibility to modify the conditions (for example, extension of the deadlines for targets);
  • The possibility of terminating or revoking agreements, including those relating to repayable and non-refundable advances, the costs incurred (e.g. the costs of legal and technical due diligence) and the financing arrangements.

7. Effects of the epidemiological situation on insurance policies

Many buildings are covered (due to bank conditions) by rental loss insurance (and/or service charge). Most insurers will refuse to make payments due to the exceptional situation. It should be noted that in the case of debt financing, the insurance claims have been (conditionally or unconditionally) transferred to the financial institutions.

Recommended measures:

  • analysis of executed insurance contracts (general terms and conditions) with a view to the possibility of obtaining insurance compensation for loss of income;
  • analysis of the executed credit line contracts with a view to activating the insurance procedure (whether an insurance claim has been transferred to the financial unit; whether such a transfer was conditional or unconditional; whether the conditions were met; how the corresponding procedure is applied, etc.);

8. The impact of the epidemiological situation on construction contracts (general contractors, equipment, etc.), egneral contractors and other contractors of buildings or fitting-out

They may not be able to meet deadlines or budgets for reasons beyond their control. The delivery dates foreseen for buildings and leased property/rental agreements may not be met.

Recommended measures:

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