Covid-19 and the Impacts on Real Estate Relations

By Marcia Calafate and Marcel Nunes, partner and associate of the International Trade, Commercial Contracts, Mergers & Acquisitions, Real Estate groups of Trench Rossi Watanabe, respectively

During the compliance period with the security measures determined by the Brazilian authorities to contain Covid-19, it is possible that contracting parties experience unexpected and unprecedented situations, such as the total or partial closure of commercial buildings, shopping centers and malls; the reduction of operating hours; the need to hire extraordinary services for cleaning and sterilizing premises; the unavailability of materials, and delays in delivery and the shortage of labor for certain services or works.

Although in the current scenario the parties may, in principle, rely on the hypothesis of act of God, force majeure and even excessive burden to review certain contractual conditions — including eventual discounts, exemptions, payment terms, fulfillment of obligations and, in extreme events, termination for cause — it is important to review carefully the respective agreement and assess the circumstances and socio-economic impacts on a case-by-case basis before any action.

In this sense, we shall also take into consideration that the decrees issued by State Governments determining the suspension of activities or the closure of shopping centers and malls will affect directly the operations and revenues of these businesses, thus compromising their ability to pay suppliers and eventually to pay landlords. It is advisable to analyze each case and the respective agreement in order to adopt possible risk mitigation measures as soon as necessary.

Furthermore, it is important to maintain an efficient communication channel with the other party so that, in good faith, both parties can achieve a fair and equitable negotiation, avoiding future disputes. The same applies to the acquisition of real estate that becomes impracticable within short- and medium-term scenarios of short marked liquidity. The parties shall negotiate for possible termination without penalties, or postpone the sale.