Force Majeure in Real Estate – May the Force be with you...

Force Majeure – Those of you with a rudimental grasp of the French language will have guessed that this legal term refers to a ‘superior force’. The theory is that if a contracting party has agreed to do something, but the performance of the obligation is effected by some unforeseeable event, then that party should be relieved of that obligation.

Common or Civil? – Different legal systems approach force majeure in different ways. In common law jurisdictions (which include the UK, India, Pakistan, Australia and the US), force majeure is less readily implied, and so it falls on the contracting parties to agree what will constitute force majeure. Hence the wording of the force majeure clause becomes critical, particularly whether it extends beyond the traditional idea of ‘acts of God’.

In civil law jurisdictions (which include France, Germany, Japan and Russia), the concept forms part of the codified law of the land and will usually apply to all contracts, unless the parties have expressly excluded its application. The UAE is a civil law country.

"The short answer is its not. Under the UAE Civil Code it is highly unlikely to be regarded as representing a physical or legal impossibility such that it would excuse either party from compliance with a legal contract."  – Jerry Parks, Head of Real Estate and Private Client at international law firm Taylor Wessing

The key word here is ‘impossible’. Not just more onerous than originally envisaged, but impossible. This impossibility can fall into either of 2 categories – physical or legal:

• Physical impossibility might be where a landlord rents a house to a tenant and the house collapses. Or where its an apartment and it’s the subject of a fire, making it impossible to occupy. In such cases the tenant should be relieved of his obligation to pay rent and the landlord should be required to reimburse rent paid in advance for the period during which the property could not be occupied.
• Legal impossibility is where some legal restriction makes it impossible for the contract to be completed as agreed. So perhaps where a government compulsory purchase order is placed on a property that is the subject of a prior sale and purchase agreement, so it cannot be transferred to the buyer for legal reasons. Or for example if the government changed the law declaring a certain previously non-UAE national designated area now to be for UAE nationals only. Arguably an existing agreement to sell a property there to a non-UAE national would be rendered legally impossible to complete in such circumstances.

Of course the talk of the town, and I guess every town around the world right now, is of Covid 19. To what extent is that an event of force majeure in Dubai real estate deals? The short answer is its not. Under the UAE Civil Code it is highly unlikely to be regarded as representing a physical or legal impossibility such that it would excuse either party from compliance with a legal contract. Granted, it may make it more difficult to comply, but travel restrictions can be overcome with a Power of Attorney and financial hardship due to a global economic downturn has never been accepted by the local courts as an excuse for non-performance.

Practical Application – Enough of the comparative constitutional law lecture. We are here talking about the real estate market in the UAE, so let’s look at the position under UAE law.

Art. 267 of the UAE Civil Code deals with force majeure and states:

In bilateral contracts, if force majeure makes the performance of the obligation impossible, the corresponding obligation shall be extinguished and the contract ipso facto rescinded.

But what about...But what about Art. 249?, I hear you cry. Good point. Art. 249 of the Civil Code states:

If public exceptional unpredictable circumstances arise, and their happening has resulted in making the execution of the contracted obligation, if not impossible, then burdensome to the debtor in such a manner as to threaten him with heavy loss, the judge may, according to circumstances and by comparing the interests of both parties, reduce the burdensome obligation to reasonable limits, if justice so requires. Any agreement to the contrary is void.

So this introduces a concept similar to the force majeure provision in Art. 267 but expressly stating that the performance does not need to be rendered Impossible. It opens the door to a situation where performance would simply be more burdensome than originally envisaged. But before we get excited, note that this provision has been narrowly interpreted by the local courts, and rightly so. It requires one to prove the unpredictability of the event (and arguably even Covid 19 could be said to be predictable after SARS) and a heavy loss which has been measured to date on a national scale, and takes little account of individual hardship. This is certainly not a lower threshold force majeure defence allowed in by the back door.

Conclusion – The decisions on the relevant articles of the Civil Code have shown us that force majeure is rarely a defence to non-performance of UAE real estate contracts by buyers / sellers. Developers may sometimes have a valid claim where projects are delayed due to the actions of Government agencies (Municipality regulation changes, DEWA requirements etc) but buyers / sellers cannot rely on force majeure to excuse non-performance.