Special Edition April 09, 2020 COVID-19: Coronavirus Implications for construction and property law in light of the officially ordered lockdown
The Coronavirus has a firm grip on our everyday lives at the moment. In order to prevent the spread of the Coronavirus, the Federal Council has issued various ordinances, and it is still not certain whether further more stringent measures will subsequently be adopted. The measures issued are already having effects on various areas of the law, such as for instance reduced working hours compensation. Construction and property law has also been affected by the measures adopted by the Federal Government in order to prevent the spread of the Coronavirus.
This article aims to illustrate the various ways in which the Coronavirus crisis is affecting construction and property law. It will consider issues such as tenancy law, the law on condominium ownership and private construction law as well as the law on contracts for works and services.
The information provided below is based on the current situation prevailing in relation to the Coronavirus, and thus on the assumption that performance will only be temporarily impaired or rendered impossible. In the event that performance were to be rendered permanently impossible, the duty to perform would lapse. Any performance already made would have to be reversed, unless risk in relation to it had already passed to the other party.
Finally, it should be pointed out that the consequences of the current crisis will naturally have to be identified in each individual case with reference to the specific contractual relationship. This means that the relevant contract, including any general terms and conditions (GTC), as well as the applicability of these GTC, must always be analysed in the first instance. In some cases, the terms of the contract (including the GTC) may already stipulate how to proceed for instance in scenarios involving governmental action or a force majeure occurrence that has an effect on contractual performance. In addition, there is no specific case law with any relevance for the current situation. Finally, it must be remembered that any subsequent measures adopted by the Federal Government are liable to change the legal position presented below at any time.
I. Tenancy law
On 28 March 2020, the Ordinance on Mitigating the Effects of the Coronavirus Pandemic on Leases (COVID-19-Ordinance Leases) entered into force. According to that Ordinance, moving into and out of leased residential or business property is permitted subject to compliance with the recommendations issued by the Federal Office of Public Health relating to hygiene and social distancing (Article 1). The payment deadline in the event of arrears with the payment of rent or accessory charges pursuant to Article 257d of the Swiss Code of Obligations [CO] that are due for payment between 13 March 2020 and 31 May 2020 has been extended to at least 90 days, if the arrears arose as a result of measures taken by the Federal Council to combat the coronavirus (Article 2). This rule also applies mutatis mutandis in relation to usufructuary leaseholders (Article 4). In partial modification of Article 266e CO, the period of notice of termination for the lease of furnished rooms and of separately rented parking spaces or similar facilities amounts to 30 days (Article 3).
Consideration must also be given to Article 266g CO, which is of assistance in relation to the termination of leases. Article 266a CO enables a lease to be terminated with good cause at any time, subject to the statutory notice period. The consequences of any such termination,under property law are determined by the courts. Depending upon the implications for the lessee, the situation currently prevailing could constitute good cause for termination.
2. Specific comments concerning rent adjustments
Due to the extraordinary situation, restaurants, hairdressers, fitness centres etc. must remain closed according to the applicable governmental restrictions. In most cases, the businesses affected operate within leased commercial premises, for which they pay rent. Due to the closure of their premises, these businesses are now generating significantly reduced revenues, or no revenues at all.
There is therefore a question as to whether these businesses are entitled to claim a reduction in the rent due to the current situation. Regarding this matter, there is currently a debate as to whether the inability to use premises as a result of the governmental restriction should be regarded as a defect within the property leased, for which the lessee is not responsible. This would mean that the lessee could claim in particular a reasonable reduction in the rent pursuant to Article 259a(a) and Article 259d CO. Under tenancy law, it is by all means possible that a leased property may be deemed to be defective owing to a governmental restriction. This is the case for example if the lessor refuses to cooperate in obtaining any necessary administrative licences, with a result that the lessor is unable to operate a restaurant business. In such cases, the lessor breaches a duty to cooperate, with the result that the lessor is unable to use the leased property for the intended purpose. Since in such cases it is the lessor that is responsible for the impossibility to use the leased property, that property is deemed to be defective and the lessor is entitled to claim a reduction of the rent.
However, in our view the position is different in situations involving the closure of businesses in ac-cordance with governmental restrictions, for which the lessor does not bear any (joint) responsibility – for example the measures to prevent the spread of the Coronavirus. The officially ordered closure imposed as a result does not impair or reduce the suitability of the object – the leased property –f or its intended use; it is simply the conduct of business activity involving dealings with the public that has been prohibited. We therefore take the view that there is no defect within the meaning of tenancylaw and the lessor thus does not have any right to claim a reduction of the rent pursuant to Articles 259a(a) and 259d CO.
As a general matter however, we are unable to assert categorically that no claim to a reduction of the rent can be brought. Such a claim could for example be brought in accordance with the maxim of clausula rebus sic stantibus: according to this rule, which has been inferred by the Federal Supreme Court from Article 2(2) of the Swiss Civil Code, the courts are required to amend or revoke a contract in the event that such an evident imbalance arises between performance and consideration as a result of subsequent unforeseeable circumstances that the insistence of one party on its claim would appear to constitute the abuse of a right. If the parties are unable to agree on a compromise, the doctrine of clausula rebus sic stantibus could provide the courts with a basis for amending the lease accordingly in line with the circumstances.
II. The law on condominium ownership
According to the governmental restrictions, meetings are banned until 26 April 2020. This also applies to condominium owners’ meetings. There is thus an issue as to how resolutions can be adopted.
Unless specified otherwise in the condominium regulations, the association may only adopt resolutions at condominium owners’ meetings or by approval of a document circulated in writing. Documents circulated in writing may only be approved unanimously, which makes it considerably more difficult to adopt resolutions. It may be possible to hold meetings by telephone or video conference. However, this is only likely to be possible for smaller associations. In addition, if there are any technical difficulties that cannot be resolved by individual condominium owners, this may risk leaving any resolutions adopted in this manner open to challenge.
Article 6a of Ordinance 2 on Measures to Combat the Coronavirus (COVID-19) provides that in the case of company meetings, the organiser may, regardless of the probable number of participants and without complying with the period of notice for convening meetings, order the participants to exercise their rights exclusively: a. in writing or online; or; b. through an independent proxy appointed by the organiser. However, it is not entirely clear whether this provision is applicable to condominium owners’ associations. Specifically, a condominium owners’ association is not a company. The adoption of resolutions in writing on the basis of that Ordinance thus entails a risk that the resolutions adopted may subsequently be declared invalid. The same applies in relation to the possibility to authorise the administrator to hold a meeting without the condominium owners but according to their binding voting instructions. Any resolutions adopted in this manner could subsequently be annulled pursuant to a challenge based on the claim by a condominium owner to participate in a meeting.
Given this legal position, it is recommended that condominium owners’ meetings only be held at present in writing if a resolution needs to be adopted urgently. In all other cases, the meeting should be postponed until a later date.
III. Private construction law and the law on contracts for works and services
The information provided below is not intended to be conclusive. It only concerns the aspects of primarily significance regarding the contractor’s entitlement to extend time limits and to claim additional costs as well as the customer’s rights. It is first necessary to establish whether standard SIA 118 has been formally declared to be a constituent element of the contract. If this is not the case, the Swiss Code of Obligations [CO] will be applicable.
1. If Standard SIA 118 has been declared to be applicable
Unless a building site closure has been ordered, work may continue provided that any protective requirements imposed by the authorities are complied with. If protective requirements imposed or delays in delivery from abroad result in disruptions to construction activity that have an effect on compliance with contractual deadlines, Article 96(1) SIA 118 must be complied with. According to that Article, contractual deadlines must be extended by a reasonable period in the event that the completion of the works is delayed through no fault of the contractor – provided that the contractor has taken any precautions within its power as well as additional precautions in order to prevent delays (Article 95 SIA 118). The contractor is not obliged to take additional precautions – expediting measures – at its own cost. It need only propose them to the construction supervisor (Article 95(3) SIA 118). The costs of any such additional measures in order to comply with deadlines must be borne by the cus-tomer and hence the contractor may only implement them with the approval of the construction supervisor. The contractor is only entitled to claim documented additional costs in respect of the additional measures, i.e. the actual additional costs incurred without any supplement for risk and profit.
However, the contractor is only entitled to extend the agreed deadlines if it reports the delay along with its cause (such as e.g. natural hazards, industrial unrest, supply disruptions, default by a subcontractor, governmental restrictions) to the construction supervisor without undue delay – unless the construction supervisor was already aware of the delay and its cause irrespective of notification (Article 25 SIA-118).
The contractor is also entitled to claim additional remuneration if extraordinary circumstances that were not foreseeable or that were discounted by the parties prevent or seriously impair completion (Article 59 SIA-118). If the parties are unable to reach agreement regarding this aspect, the courts specify the additional remuneration or alternatively approve the termination of the contract. The duty to report under Article SIA-118 applies also in this regard
2. If the application of standard SIA 118 has not been agreed to
If the parties have not incorporated standard SIA 118 into the contract as a constituent element, the consequences of any delay caused by the Coronavirus crisis are determined in accordance with the CO. However, the provisions of the CO governing contracts for works and services do not contain any specific rules applicable to such a scenario. Accordingly, the consequences of any delay to performance are determined in accordance with the general rules laid down by the CO and the allocation of risk provided for thereunder: if the reason for the delay falls within the ambit of the contractor’s risk due for instance to a delay in the delivery of materials, the contractor does not have any direct entitlement to an extension of deadlines and is thus deemed to be in default. If on the other hand it is not at fault for the delay in performance, the customer must grant it a reasonable grace period in order to perform. The customer is only able to refuse subsequent performance and to withdraw from the contract if the contractor fails to perform within the reasonable grace period set, and provided that the former declares its intention to do so without undue delay. In our view, the customer should not be able to claim damages due to accidental loss (Article 103(1) CO) and the contractor should not incur any liability for delayed performance, non-performance or losses relating to withdrawal from the contract (Article 103(1), Article 107(2) and Article 109(2) CO), provided that the contractor is not at fault for the delay. Such claims are conditional upon fault. Provided that the contractor is not at fault for the delay, a question thus arises as to what constitutes a “reasonable grace period” in view of the extraordinary situation prevailing throughout the world. According to general principles, a grace period is deemed to be reasonable if, considered objectively, it enables the contractor to comply with its duty to perform. This means that the grace period that should be set for a contractor that is unable to perform as a direct consequence of the Coronavirus crisis should be sufficiently long in order to enable it to complete its work at normal cost following the termination of the impediment caused by the Coronavirus crisis. This means that the contractor does not have to implement or propose any expediting measures.
The position is however different if the contractor’s delays are not caused by the Coronavirus crisis, but rather due to its own fault. The contractor must bear responsibility itself for any such delays, even during the current difficult period. These fall within the ambit of its own risk.
In a similar manner to SIA-118, the CO regulates the consequences of extraordinary circumstances for which neither party is at fault that prevent or seriously impair completion. According to Article 373(2) OR, upon application by a party the court may at its discretion order an increase in the price or approve the termination of the contract in the event of extraordinary circumstances that could not be foreseen or that both parties assumed would not obtain.
To summarise, the question as to whether the contractor is at fault for a delay always arises in relation to building site delays. It is likely that this will not always be so easy to decide, as the contractor is not entirely blameless for every sequence of events that ultimately gives rise to a delay. Consider the following example in relation to the hygiene measures ordered:
If as a result of the hygiene measures ordered the contractor is no longer able to employ as many workers on the building site as planned, it is not at fault. However, if SIA standard 118 is applicable, it is obliged to inform the customer or its construction supervisor promptly concerning the resulting delay and for example to propose to the latter shift work as an expediting measure, along with the associated additional costs. The contractor is required to proceed accordingly, depending upon the decision taken by the customer or the construction supervisor. If only the CO is applicable, the contractor is only required to report a delay for which it is not at fault, and is then entitled to an extension of time limits. According to both SIA standard 118 as well as the CO, the customer is responsible for any additional costs arising in relation to the “hygiene measures ordered”, for which it was not at fault.
The position is different if the contractor fails to comply with or complies incorrectly with the hygiene measures ordered: if its building site is closed as a result, it will be at fault for the resulting delay and will accordingly have no entitlement to an extension of deadlines as a result of the closure of the building site. It will also be required to bear any additional costs arising as a result. However, it will naturally still be entitled to an extension of deadlines as a result of direct consequences of the “ordering of hygiene measures”, provided that it has reported these consequences promptly to the customer or the construction supervisor and taken the necessary precautions.
IV. Further questions
Due to the developing situation and the different circumstances of each individual case, we recom-mend that you contact us with any legal questions.