Impact of the Covid-19 pandemic on real estate contracts: analyses of the Brazilian legal framework and case law
Debora Chaves M Fernandes
Machado Meyer Advogados
Machado Meyer Advogados
Maria Flavia C Seabra
Machado Meyer Advogados
The Covid-19 pandemic has already been recognised as an event of force majeure in different jurisdictions across the globe. It is not only an unforeseeable event but is also irresistible both in its occurrence (unavoidable) and in its effects (insurmountable) and is having a significant effect on many types of contractual arrangements, including real estate contracts. This scenario is no different in Brazil, and discussions about the effects of the pandemic, as well as the measures that have been adopted to prevent the spread of the virus, have now taken place in the judiciary and in Congress.
Legal provisions from the Brazilian Civil Code
The legal framework to address the impact of supervening unpredictable events with uncontrollable consequences – such as the pandemic – on private contracts is already well established in the Brazilian Civil Code (BCC). As to the effects of acts of God and force majeure in contracts, the BCC provides that the debtor party shall not be liable for losses resulting from such necessary acts, the impact of which could not be avoided by the parties, where the agreement does not expressly so provide (Article 393, main provision and sole paragraph). Through the unpredictably theory (Article 317 of the BCC), the parties can pursue before the courts, the review of the amount agreed on a certain contract if an unforeseeable event causes a manifest and relevant misalignment between the parties' obligations under such agreement. Finally, the Excessive Burden concept (Articles 478 to 480 of the BCC), on the other hand, provides that if, due to unforeseeable events, the obligations under a contract become: (1) excessively burdensome on one party (the debtor party); and (2) provide an extreme advantage to the other party (the creditor party), the debtor party may request the termination of the agreement. Such termination can be avoided if the creditor party agrees to adjust the mutual obligations on an equitable basis.
These were the legal provisions and theories that the parties resorted to when the first cases discussing the effects of the pandemic over real estate contracts were taken to the courts. Most of the scarce case law discussing this matter is related to commercial lease agreements – in the areas that were most affected by the restrictive measures to cope with the pandemic, such as restaurants, shopping malls, stores and commercial spaces – and are grounded in the articles of the BCC.
Act No 14.010/2020
Despite the provisions of the BCC being directly applicable to the effects of the pandemic on real estate contracts, Brazilian legislators responded quickly to the unprecedented crisis, passing a bill in less than three months from the beginning of the measures to prevent the spread of Covid-19 impacting in an unreasonable way. Despite several ideas and discussions on how to address real estate matters during the bill process, neither temporary suspension of payment of rent for residential leases nor special rules for agrarian leases were approved. The main goal of Act No 14.101/2020 was instituting emergency and transitory rules, applicable to private law relations during the period of public calamity caused by the Covid-19 pandemic.
Ultimately, apart from the suspension for acquisition of adverse possession, none of the other emergency rules addressing real estate contracts were approved, and the text of Act No 14.010/2020 has not impacted significantly on these types of contracts. These rules were excluded from the approved version of the bill because it was understood that either there were other legal provisions to address eventual issues between the parties induced by the pandemic or the proposed emergency rules created imbalance between the parties instead of resolving it.
Precedents about the impact of Covid-19 on real estate contracts
This cautious approach by the legislators was also observed by the courts. There is no controversy under the qualification of the pandemic as a force majeure event – as it fits the very definition of an ‘unforeseen and unpredictable fact, the results and impact of which cannot be prevented or avoided by the parties’, as provided by Article 393 of the BCC. However, the current position of Brazilian courts is that such force majeure event affects both parties in a contractual relationship without distinction – therefore, the review or the premature termination of a contract, without the due applicability of contractual sanctions – has to be based on the actual and demonstrated effects of the pandemic on the parties’ economic capacity. In this context, the proactivity of the parties to negotiate and adopt the measures to mitigate the losses arising out of the pandemic before taking the matter to the courts is being considered as vital to determine the chances of success of such claim – the more a party resists compromising to reach a negotiated solution, the less the chance of having a successful claim before courts.
Most of the available precedents considering the impact of the pandemic in real estate contracts refer to commercial lease contracts, as a large number of commercial sectors were severely impacted by the restrictive measures to prevent the spread of Covid-19 – such as restaurants, shopping centres, stores for non-essential items and movie theatres – which resulted in a drastic and sudden decrease of their revenues. Therefore, the most common aspect of real estate contracts being taken to court by lessees revolve around the possibility of suspending or reducing the leasing instalments. In these cases, the precedents from São Paulo Appellate Court – the Brazilian state court with the largest number of cases – are observing two thresholds to assess: (1) there must be concrete proof of the contractual imbalance and reduction of the economic capacity of the lessee induced by the pandemic; and (2) the lessor must be reactive to negotiated solutions to try to mitigate the impacts of the crisis. If these requisites do not hold, the prevailing understanding is that there is no reasons to interfere with the autonomy of the parties and temporarily suspend or reduce the rental values.
In one specific case, taken as an example of what was previously stated, the São Paulo Appellate Court granted an appeal filed by the lessor against a decision rendered by the first instance judge that, in preliminary grounds, reduced the amount paid monthly by the lessee due to the Covid-19 pandemic. The São Paulo Appellate Court, then, revoked the first instance decision considering that: (1) the economic crises caused by the pandemic presumably affects both contracting parties and, therefore, could not have provoked a contractual imbalance; and (2) the lessor had already reduced the rental amount by 70 per cent during the Covid-19 pandemic, which was to be paid later by the lessee in 17 instalments.
Although these are still preliminary decisions, as they refer mostly to injunctive relief, anti-injunction measures and interlocutory appeals against such decisions, and relate to one specific type of real estate contract, they define a clear tendency of how Brazilian courts are approaching contractual review and termination claims based on the pandemic crisis – an approach that tends to favour the preservation of the contract and privilege the autonomy of the parties to negotiate and find an equitable solution.
Based on the preliminary data available, it is possible to conclude that, even though the consequences of the pandemic have harshly affected real estate contracts – mostly due to a sudden decrease of revenue of private individuals and legal entities – the courts and legislators have been cautious on reviewing or suspending terms and clauses entered by the parties in private contracts, including real estate agreements. Instead, they have preferred to preserve the contracts and the autonomy of the contracting parties to negotiate extrajudicial solutions to rebalance the disparities caused by the pandemic, therefore privileging the legal certainty over thoughtless decisions rendered in the heat of the moment.