This article will address the applicability of the force majeure to construction contracts in the light of the declared state of emergency in the Republic of Bulgaria due to COVID-19 and how this affects residential and office buildings under construction.
According to the orders of the Minister of Health and the State of Emergency Measures and Actions Act, the work on construction sites has not been suspended. Following the announcement of the state of emergency, a request was made to the Sofia Municipality, according to which it was confirmed that as of March 17, 2020, construction works could be carried out if a large number of people do not gather in one place.
In view of the foregoing, the declared state of emergency does not constitute а force majeure for construction of buildings respectively – for the carrying out of the obligations of the investors. However, this article examines the possible risks in a situation where anti-epidemic measures result in a construction ban. The indirect result of force majeure is only the inability to put the buildings into operation, as the administrative deadlines for the entry into force of the use permits / exploitation certificates do not run.
Bank loan agreement
Loans and construction financing contracts are the most significant issue that puts the completion of projects at risk. Often, in credit agreements, commercial banks do not agree on specific conditions regarding the applicability of the institute of force majeure. Therefore, the general rules in Art. 306 CA and investors may invoke force majeure in the event that they were not in default prior to its occurrence with respect to all obligations in the contract, except those related to the payment of the instalments. Examples of such obligations may be:
- Completion of a certain stage of construction by a certain period;
- Reaching a certain number of sales by the completion of a certain stage;
- Presentation of documents, the issuance of which depends on a state body.
If such circumstances exist, you should inform the bank in writing of the circumstances you consider to be force majeure and describe the default on which contract obligations will affect.
In case the duration of the force majeure does not directly impede the fulfilment of the contractual obligation (the deadline for submission of the use permit is after 12 months, but the force majeure has been available), it will be applied accordingly to the specific term and the latter will be extended by the duration of the force majeure. This stems from the provision in the Commerce Act, which stipulates that for the duration of force majeure, the performance of obligations and related counterparts is suspended.
To the extent that many disputes may arise with banks on this subject, we advise you to sign the relevant annexes to the credit agreements so that there is no ambiguous interpretation of the duration and the existence of such circumstances at all.
A significant difficulty arises out of the work of the administration, whose activity is severely affected by the state of emergency. So far, there are no significant delays in its work, but the major problem is that, due to the State of Emergency Measures and Actions Act, administrative acts cannot enter into force. Thus, building permits have not been issued at all after 13.03.2020, and those issued before 29.02.2020 cannot enter into force.
Preliminary contracts and construction contracts
If force majeure exists, you should notify all buyers in advance that the completion time for their separate items may be extended by the time during which force majeure exists. Again, to avoid disputes, we recommend that you sign the relevant annexes to the preliminary contracts.
The same rules apply to construction contracts concluded between investors and construction companies.
Termination of contracts
In accordance with the provision of Art. 306, para. 5 CA If the force majeure lasts so long that the creditor or the debtor no longer has an interest in the performance, then they have the right to terminate the contract. We believe that this provision can hardly be applied to construction contracts or preliminary sales contracts. This hypothesis may be applied to “fixed transactions” or other transactions whose term of performance directly results in the irrelevance / uselessness of the contract result obtained.