Understanding Force Majeure in Real Estate: Justifying Handover Delays

WHEN THE UNFORSEEABLE HAPPENS: FORCE MAJEURE IN REAL ESTATE

Possession handover delays in UAE are one of the main reasons that attracts disputes between the buyers and the developers which further pave the way towards litigation. These handover delays can be due to various reasons that include the purposeful delay on the part of the developer, financial constraints, delay in receiving compliance certificates from the appropriate authorities, etc. But all these incidents are due to the negligence caused either by the developer or by the purchaser. However, in certain situations the delay may be caused by reasons outside the control of either parties. Such incidents are called ‘Force Majeure’.

Can ‘Force Majeure’ Justify the Delay in Real Estate?

In the UAE, the Sales Purchase Agreement (SPA) regulates the real estate transaction between a buyer and a developer. The SPA comprises of the clauses relating to rights and duties of the parties, term and termination, period of reasonable delay and remedies available in case of breach. The law in UAE permits a maximum of 12 months delay from the expected date of delivery to the actual delivery. If the period of delay extends beyond that, the buyer is entitled with the right to approach the competent authority seeking compensation from the developer. The compensation may be claimed for reimbursement for additional rent incurred, relocation costs, storage fees, other reasonable expenses that is directly involved in, and so on. But in situations where the delay is caused by force majeure, the compensation is not a right but rather at the discretion of the Court.

The UAE legislations have set out certain principles to check out whether force majeure can be claimed as an exception. The possession handover delays in real estate can be attributed to force majeure only if it is proved that the delay is caused by any act beyond the reasonable control of the party, which the party causing such delay, could not have reasonably expected, foreseen or predicted even after the exercise of due care and professional prudence. However, the party shall not be exempt from liability in such delay, failure or violation, if such was caused by general market or economic conditions or due to an epidemic.

Hence, a delay in handover can be justified by force majeure, only if the following conditions are satisfied:

  • Sole Reason: The situation must be the sole reason of the delay caused.
  • Unforeseeable Event: The situation must be an unforeseeable event that even reasonable prudence and professional diligence could not minimise the happening of it.
  • A Direct Link: Such situation must have a direct connection in the specific performance of the contractual obligations.
  • Actual Prevention: The situation has ‘actually prevented’ the possession handover.
  • Absolute Impossibility: The situation has made the hand over ‘absolutely impossible’. A temporary impossibility can never be a force majeure incident.

While considering these requirements it is important to note that if only a part of the contractual obligation is affected with the force majeure, then that particular part of the contract ceases to exist while the remaining part exists. Further, apart from other epidemics, COVID-19 can be considered as a situation of force majeure, when it is directly linked with the specific performance of the contract and if it has ‘actually prevented’ the parties in performing their obligation.

Rights Available to Person Claiming Force Majeure in Real Estate

The developers who claim force majeure are entitled to avail extension of time provided that they could prove the claim of force majeure. The period of extension can be decided either on a mutual understanding between the parties or at the discretion of Court considering the severeness of the situation.

If it is sufficiently proved that the impossibility resulted by force majeure has caused a grave loss to the developer, then the developer is entitled to claim the termination of the contract. To better understand how force majeure is applied in the real estate sector in the UAE, it is helpful to examine specific examples and case studies:

  1. Natural Disasters: In cases where natural disasters such as earthquakes or floods disrupt construction activities and delay project completion, developers can claim force majeure. For instance, if a hurricane destroys a construction site, making it impossible to continue work, this situation will meet the criteria for force majeure. The developer would need to provide evidence of the extent of the damage and its impact on the project timeline.
  2. COVID-19: The COVID-19 pandemic serves as a contemporary example of force majeure. During the pandemic, many construction projects faced delays due to lockdowns, supply chain disruptions, and labour shortages. In such cases, developers could claim force majeure if they could demonstrate that the pandemic directly prevented them from fulfilling their contractual obligations. However, the Court would assess whether the developer took reasonable steps to mitigate the impact of the pandemic on the project.
  3. Regulatory Changes: Significant changes in government regulations or policies that affect construction projects can also be considered force majeure. For example, if a new zoning law prohibits construction in a certain area, rendering it impossible for the developer to proceed with the project, this change would qualify as force majeure. The developer would need to show that the regulatory change was unforeseeable and beyond their control.
  4. Acts of War or Terrorism: Events such as war or terrorism that disrupt construction activities and create unsafe conditions for workers can be classified as force majeure. For instance, if a construction site is in a conflict zone and the situation deteriorates to the point where continuing work is impossible, the developer could claim force majeure. Evidence of the conflict’s impact on the project’s feasibility would be required.

Nevertheless, the developer can activate such rights only if he has produced a notice claiming delay due to force majeure at least a month after his contractual obligations had come to a halt due to the situation.

Mitigating the Impact of Delays

While force majeure can provide a valid justification for delays, it is crucial for both buyers and developers to take proactive steps to mitigate the impact of such delays. Here are some strategies to consider:

  1. Comprehensive Contractual Clauses: The SPA should include detailed clauses addressing force majeure events, specifying what constitutes force majeure and the procedures to be followed in such cases. Clear definitions and guidelines help avoid disputes and ensure both parties understand their rights and responsibilities.
  2. Regular Communication: Maintaining open and regular communication between buyers and developers can help address potential delays promptly. If a force majeure event occurs, both parties should discuss the situation and agree on a reasonable course of action, such as extending deadlines or modifying contractual terms.
  3. Risk Management: Developers should implement robust risk management practices to anticipate and mitigate potential delays. This includes conducting thorough risk assessments, diversifying suppliers, and having contingency plans in place for unforeseen events.
  4. Legal Advice: Both buyers and developers should seek legal advice to understand their rights and options in case of delays. Legal professionals can help interpret contract terms, negotiate extensions, and represent their clients in disputes.
  5. Alternative Dispute Resolution (ADR) Clauses: Including ADR clauses in contracts can provide a framework for resolving disputes arising from delays more efficiently and amicably than traditional litigation. Mediation and arbitration can offer quicker and less adversarial resolutions.

Delays in property handover can be quite challenging for the buyers. But it becomes even more challenging when such delays are justified, as it closes the option to avail remedies. But by ensuring that the SPA has included the terms to surpass force majeure situations and with right legal advice these challenges can be mitigated.

In summary, force majeure can justify delays in property handovers if the event causing the delay is unforeseeable, beyond the control of the parties, and directly impacts the contractual obligations. However, this justification is subject to strict legal scrutiny, and the burden of proof lies with the party claiming force majeure. Proactive measures, clear contractual terms, and effective communication are key to managing the risks associated with such delays. Understanding and preparing for force majeure events can significantly reduce the stress and financial burden on both buyers and developers, ensuring smoother transactions and project completions even in the face of unforeseen challenges.

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