Special Edition LFA Covid-19 : Real Estate and Finance I Update March 24, 2020

Even though Bruno Le Maire, the French Minister of Economy and Finance, explained on 29 February 2020 that the Covid-19 epidemic was a case of force majeure for companies, particularly in relation to the State’s public procurement contracts, it is nevertheless necessary to determine whether force majeure applies on a case-by-case basis, in particular for private procurement contracts.

Moreover, the emergency law to deal with Covid-19 published on 24 March 2020 does not expressly recognize the epidemic as a case of force majeure.

For public procurement contracts, the application of force majeure must therefore be analysed on a case-by-case basis, in particular by checking whether the schedule of particular administrative clauses (i.e. CCAP) do not derogate from the schedule of general administrative clauses (i.e. CCAG).

Force majeure is either provided for by contract or,failing that, by law or case law.

Pursuant to Article 1218 of the Code civil, “Force majeure in contractual matters shall exist where an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of conclusion of the contract and which effects cannot be avoided by appropriate measures, prevents performance of the obligation by the debtor.”

If the conditions of force majeure are met, companies can invoke it to suspend their contractual performancesuch as ongoing works.

In contractual matters, it presupposes that the event which prevents the continuation of the works is beyond the control of the construction company, is unforeseeable at the time of the conclusion of the contract and unavoidable (“irresistible”), i.e. that it cannot be avoided by appropriate measures[1].

While the unpredictability of contracts concluded before the detection of the Covid-19 epidemic is not in doubt, the condition of irresistibility will have to be assessed on a case-by-case basis.

Another way to approach the difficulties in the performance of a contract arising from the Covid-19 epidemic under French is to renegotiate the contract pursuant to Article 1195 of the Code civil. This Article provides that parties may renegotiate their contract where a change in circumstances unforeseeable at the time of the conclusion of the contract makes performance excessively costly for one party.

[1] Art. 1218 C. civ.

Again, it depends on whether the contract provides for a definition of force majeure. If it does not, one has to refer to the law and case law.

Building sites are increasingly difficult to manage during this health crisis.

Between suppliers closing one after the other, worried employees and the difficulty of strictly enforcing the necessary health recommendations, some companies describe a situation that has become “untenable”.

The extension of the epidemic in France and the liability issues it raises have caused tension between the actors and professional organisations in the construction industry and the Government. The construction industry is calling for a closure of the building sites, while Emmanuel Macron’s speech on 16 March 2020 urged companies and employees to continue their activity so that the economy does not come to a standstill.

According to a press release issued on Saturday 21 March, an agreement has now been reached: “The representatives of the building and public works companies and the Government agreed on several principles allowing to reinforce, in the next few days, the continuity of the activity of the sector and the continuation of the building sites“.

As long as a company respects the health standards and directives, it may not be held liable in this regard.

In principle, the reasons for postponing the delivery date are provided for in the contract.

Failing this, or if no reason for delay can justify postponing the delivery date, the delivery date may be postponed due to force majeure, provided that the legal conditions for it are met.

With regard to public procurement contracts, the State and local authorities acknowledged on 28 February 2020 that the Covid-19 epidemic was a case of force majeure. Penalties for delay in public procurement contracts will therefore not be applied. It will nevertheless be necessary to confirm on a case-by-case basis that difficulties relating to the performance of contracts fall within the scope of force majeure and to ensure that the contracting authority takes the case of force majeure into account.

In addition, construction companies could alternatively request the postponement of the delivery date by renegotiating their contract in the event of a change in circumstances unforeseeable at the time of signing the contract which makes the performance of the contract excessively costly[1]. Again, before making this request, it should be confirmed whether the contract has not expressly excluded this possibility.

[1] Art. 1195 C. civ.

The non-payment of rent and/or of the provision for charges is in principle a contractual non-performance. The landlord could take advantage of it to ask for the payment of interest on account of late payment or to terminate the commercial lease contract.

A tenant may nevertheless suspend the payment of rent and the provision for charges if this is provided for in the commercial lease. Failing this, he could suspend the payments in will have to justify the impossibility to pay rent and the provision for charges.

An administrative closure of commercial premises could be a sufficient reason to prove irresistibility if the company cannot take any alternative measures to use the premises (e.g. in certain cases by distance selling or home delivery).

In the event of administrative closure, the landlord will no longer be able to meet its delivery obligation. The tenant could thus rely on the landlord’s breach of contract to suspend his obligation to pay rent in accordance with Art. 1220 C. civ. He should nevertheless verify that the conditions of force majeure are met and ensure that the case of force majeure is taken into account by the landlord.

Notwithstanding the closure of the premises, a significant decrease in turnover could also make it impossible to pay rent and the provision for charges. However, this would have to be proven.

In any event, as the application of  force majeure remains uncertain, tenants should inform the lessor of any payment difficulties and of their intention to suspend payment of the commercial rent and the provision for charges.

The French Ministry of Economy and Finance also states that micro-entreprises in payment difficulty may request by e-mail or telephone an amicable extension of their deadlines by notifying anyparty concerned, in particular the landlord[1]. The Emergency Act to deal with the Covid-19 epidemic allows the government to take any measure in this regard by ordinance[2].

Furthermore, several associations in the real estate sector (Association Française de la Gestion Financière, Association Française des Sociétés de Placement Immobiliers, Groupe Caisse des Dépôts, Conseil National des Centres Commerciaux, Fédération des Sociétés Immobilières et Foncières Union Nationale des Propriétaires Immobiliers) have called on their members to suspend the payment of rent and charges as of 1 April 2020 and for subsequent periods of business interruption, especially  for tenants who are very small, small and medium-size businesses belonging to one of the sectors whose business is suspended by law.

[1] https://www.economie.gouv.fr/coronavirus-soutien-entreprises

[2] Art. 11 I 1° g) of the Emergency Act No. 2020-290 from 23 March 2020 in order to deal with the Covid-19 epidemic, JORF No. 0072 from 24 March 2020, Text No. 2.

No, a buyer cannot cancel a purchase because of the Covid-19 epidemic, as soon as he has signed a compromise or a bilateral promise.

In fact, on 14 March, French Prime Minister Edouard Philippe announced the passage to stage 3 of the fight against the epidemic and the closure of all places “not essential to the life of the country”. Real estate agencies and notaries can no longer welcome their clients on their premises, including for the signing of contracts.

The planned signing of provisional sales agreements or the signing of final deeds of sale must therefore be postponed.

Likewise, if a buyer has made an offer to a seller, he may also extend the duration of his offer.

The possibilities to suspend the payment of the terms are provided for in the loan contract.

In addition, French banks have undertaken to defer the repayment of corporate loans for up to six months and to withdraw the penalties and additional costs of deferrals of maturities and corporate loans[1].

Failing this, a debtor could suspend payment of terms in the event of force majeure. For invoking force majeure, please refer to our introduction.

If payment is not suspended, a debtor in payment difficulties could ask the creditor for an amicable payment schedule.

If the credit institution refuses the rescheduling of the bank credit, the matter may be referred to the French Credit Mediator on his website.

The debtor could also argue that the Covid-19 epidemic constitutes a change in circumstances unforeseeable at the time of the signing of the contract which makes the performance of that contract excessively costly[2].

[1] http://www.fbf.fr/fr/files/BMQP34/CP%20FBF%2015%20mars%202020%20-%20Coronavirus%20mobilisation%20totale%20des%20banques%20fran%C3%A7aises.pdf

[2] Art. 1195 C. civ.

Yes, a creditor may invoke the legal set-off of the security deposit against debts not paid by the debtor where the debts are reciprocal, fungible, certain, liquid and due[1]. It should be noted that the grace period does not preclude legal set-off[2].

Set-off between the security deposit and the debts of the debtor may also contractually be provided for.

The debtor may assert temporary difficulties of payment, and may apply on this ground for suspension of payment of the debts or for rescheduling of the terms. An amicable agreement between the debtor and the creditor can be reached.

[1] Art. 1347 and 1347-1 C. civ.

[2] Art. 1347-3 C. civ.

President Macron announced on Monday, 16 March 2020 that the State would guarantee up to 300 billion euros for bank cash loans requested by companies between 16 March 2020 and 31 December 2020. This guarantee is now provided in the organic law amending the budget for 2020[1].

This guarantee covers principal, interest and accessories.To benefit from this guarantee specific conditions must be met, and in particular the following[2]:

• The loan must have a minimum grace period of twelve months and must include a clause giving the borrowers the option, at the end of the first year, to amortize it over an additional period of one, two, three, four or five years.
• Eligible for the guarantee are companies that are legal or natural persons, with the exception of civil law real estate companies (i.e. sociétés civiles immobilières), credit institutions or finance companies and companies in insolvency (i.e. procédure collective).
• The amount of the loan eligible for the State guarantee is limited.
• The amount of the guarantee covers a percentage of the amount of the capital, interest and accessories remaining due on the debt until the expiry of its term.
• No other guarantee or security can be provided for the loan.

The Emergency Act to deal with the Covid-19 epidemic of 24 March 2020 provides that the Government shall take, by ordinance, any measure to strengthen the capacity of the Banque publique d’investissement to grant guarantees[3].

[1] Art. 6 of organic law No. 2020-289 amending the budget for 2020, JORF No. 0072 from 24 March 2020, Text No. 1.

[2] Order of 23 March 2020 granting the State guarantee to credit institutions and finance companies pursuant to Article 4 of Act No. 2020-289 of 23 March 2020 amending the budget for 2020, JORF No. 0072 of 24 March 2020, Text No. 10.

[3] Art. 11 I 2° h) of the Emergency Act No. 2020-290 from 23 March 2020 in order to deal with the Covid-19 epidemic, JORF No. 0072 from 24 March 2020, Text No. 2.