Covid-19 effects on the performance of real estate agreements in Colombia
The Covid-19 outbreak has had a serious impact on the real estate sector in Colombia and in the performance of some real estate contracts, due to the measures taken by national and local authorities to control the pandemic. The sector endured through a complete standstill for a period of approximately two months, causing: (1) a harsh impact that, in accordance with the projections of the Colombia Chamber of Construction (‘Camacol’) will imply a reduction of new housing construction and sales of the current inventory of ten per cent and 21 per cent respectively for 2020; and also (2) the suspension, renegotiation or termination of some real estate contracts that were executed before the pandemic.
Main measures taken by national and local authorities
The Colombian Government through the declaration of the State of Economic, Social and Ecological Emergency on 17 March 2020, which in principle enables the president to take extraordinary measures in order to mitigate the impact of the pandemic, has issued a series of legal regulations that have an impact in the real estate sector. The main measures or regulations include:
- in the first six weeks of the pandemic, a strict lockdown and the closure of most industrial and commercial activities, including construction;
- decrees authorising lessees the early termination of lease agreements (both commercial and residential) under certain conditions; and
- biosecurity protocols for reopening construction activities, imposing limitations on working hours, maximum number of workers and some additional biosecurity measures that increase costs for construction companies.
Impact on real estate contracts
The pandemic and the measures adopted by the Colombian government had an immediate effect on the execution of real estate contracts that were in force and effect when the pandemic started and they have changed the way in which most real estate contracts are negotiated now.
Within the more restrictive period of the preventive quarantine, the execution and enforcement of real estate agreements suffered a refractory period while the involved parties analysed the new situation and adapted to the measures established by the Colombian Government.
A general tendency towards a mutual temporary renegotiation of terms was carried out within most real estate agreements. Specifically, in commercial lease agreements both the government and generally all the actors within the sector recommended that a mutual renegotiation was the most valuable and mutually beneficial measure for both parties to face the economic crisis. Another common tendency within civil construction work agreements was the suspension of all contracts related to the projects during the strict initial preventive quarantine, to both comply with the measures instituted by the government and to reduce costs during this period to the minimum possible expenditure to protect the company’s cashflow as long as possible. Similarly, as most construction operations were halted during this period, most supply agreements were also suspended until activities could begin anew.
These renegotiations and suspensions of real estate agreements in general, were based upon three main arguments or theories: (1) force majeure; (2) theory of imprévision; and (3) theory of causality.
First, force majeure clauses – based on Article 64 of the Civil Code which establishes that unforeseen and non-resistible events such as a shipwreck, an earthquake, an arrest by enemies, authority decisions exercised by a public official, etc – that may enable one (or both) of the parties to avoid the compliance of an obligation, are a common practice in Colombian real estate legal agreements where the parties make an effort to draft some events that might cause the impossibility to comply on the basis of force majeure. Many of the agreements which were unenforceable due to the pandemic, were initially analysed to review the possibility of termination if Covid-19 was considered as a force majeure event. The results of this analysis varied on a case-by-case basis, a certain percentage were effectively terminated, but the majority used the force majeure argument as the basis for a renegotiation of terms during the pandemic.
Second, the theory of imprévision – based on Article 868 of the Colombian Commercial Code which states that if during the performance of the contract one of the parties suffered a hardship, the contract can be intervened by the judge to re-establish the equilibrium – was used as an argument in the renegotiation of terms in real estate agreements as the pandemic caused a hardship on the conditions for the execution and performance of these agreements. As an example, commercial lease agreements saw a complete shift in their specific conditions as the properties were available for use, but the heavy mobility restrictions made their use very difficult or impossible depending on their specific use (office buildings were rendered mostly unusable as workers were not allowed to leave their homes unless it was absolutely necessary).
Finally, the theory of causality was used to reinforce the principle of cooperation between parties of real estate agreements as the legal basis for renegotiating terms. Through this argument the parties were driven to a mutually beneficial agreement where the contract’s enforceability was protected over time as a measure to endure the pandemic and the associated economic crisis, whilst protecting the commercial relationship between the parties in the long term.
Regardless of the theory on which the parties based the terms of a renegotiation or termination of an agreement, we found that the frequent scenario is the continuity of its execution, under the premise that the risk of an unfriendly termination could have negative consequences for all parties involved and, there is no certainty on what would be the outcome if a dispute ends up in court. In fact, there is no available case law in Colombia that allows to predict with a good level of certainty the consequences of a dispute under these extraordinary circumstances. Finally, on real estate contracts negotiated after the pandemic, we have seen, and we have encouraged the inclusion of some provisions to regulate the contractual effects under extraordinary circumstances as the pandemic. The negotiation of such new provisions has been a challenge since parties have to define not only what the contractual consequences on time delivery, price, suspension, or termination would be, but also the definition of what they understand for extraordinary circumstances. At the end, we believe parties are more amenable to include such kind of provisions as now they understand the importance of having contractual certainty under uncertain events.
Outlook of the real estate sector and measures to improve it
In conclusion, understanding that the economy as a whole will suffer the consequences of the pandemic, we believe that the real estate sector will improve more rapidly compared to other sectors of the economy. In fact, due to their economic importance, construction sites and generally real estate and infrastructure civil works were the first sectors of the economy to be allowed to initialise activities and, in the case of the real estate sector, to benefit from certain extraordinary incentives issued by the government, including an incentive plan for the purchase of 200,000 low-income housing (vivienda de interés social) and middle-income housing. In the end, it is no secret that construction of both residential and non-residential buildings contributes over three per cent of Colombia's GDP, and construction as a sector makes up about seven per cent.
Construction is key in the generation of employment and the improvement of other related industries or activities. Therefore, based on such importance and some announcements by the Colombian Ministry of Housing, more measures and incentives are expected to come in the near future.