New Belgian Contract Law Published Today - 10 key changes that will have an important impact on the real estate sector
01 July 2022
The succession of important legal changes impacting the real estate sector continues. Today, the April 2022 law adopting a new Belgian contract law regime has been published in Belgian official journal. While the new rules will only apply to contracts entered into after 1 January 2023, it has now become the new ‘law of the land’, and will immediately influence negotiating strategies, the drafting and litigation of leases, asset deals and share deal
1. Pre-contractual liability: under the new law, the sanctions applicable to the wrongful termination of negotiations are clarified. In particular, the party wrongfully terminating the negotiations will be liable to indemnify the other party for the costs incurred by that party in the context of such negotiations. Furthermore, if the terminating party had created the legitimate expectation that the contract will be signed, the subsequent termination of negotiations may trigger an obligation for the terminating party to compensate the other party for the loss of the expected net profits.
2. Abuse of circumstances: continuing the trend initiated in the framework of recent B2B regulations, the new civil cause codifies the wrong, “qualified disadvantage”, which is now entitled “abuse of circumstances”. The new civil code defines an abuse of circumstances as a manifest imbalance between the performances of the parties as a consequence of the abuse by one party of circumstances linked to the weak position of the other party. Such abuse allows the court to either terminate the agreement or to unilaterally amend its terms and conditions, with far-reaching consequence for parties. This evolution reinforces the importance of justifying the economic reasons for clauses that may appear imbalanced (for instance, by stressing in the contract the link with another provision which is favourable to the other party) and to document the intent and general economic understanding of the parties during the negotiations.
3. Anticipatory breach: the civil code also adds a new remedy to the array of remedies available to creditors: termination for anticipatory breach. Under the new law, a creditor will be entitled to terminate a contract even before its debtor is in breach of its own obligations, provided that, after giving prior notice, it is clear that the debtor will not perform its obligations in due time and the consequences of the non-performance are sufficiently serious for the creditor. This will be especially useful (or damaging) in the context of long-term obligations such as the completion of a building or the delivery of premises, if the delay has become so important that it is apparent beforehand that the contractual deadline will not be met. The parties are free to exclude this possibility in their contract, which could be in the interest of a developer in the context of a development contract, for instance.
4. Change of circumstances: One of the most commented modifications of the new regime is the formal introduction of the hardship theory under Belgian contract law. If a change of circumstances would make the execution of the contract extremely onerous for one of the parties so that it is no longer reasonable that performance is expected, the parties are obliged to renegotiate. In case of a refusal to negotiate, or if the negotiations do not lead to an agreement, the court will be able to terminate the agreement or to adjust the terms of the agreement. The power for the courts to amend the terms of the contract is exceptional and rather unique. Other countries that apply the hardship theory, such as France, only allow the courts to terminate the agreement in such a case. As a consequence, even though it would remain possible to perform an obligation (ie no force majeure event), a debtor could be released from such obligation – or secure more favourable terms – if unforeseen circumstances have rendered the performance of the obligation more onerous. Many examples illustrate the potential important impact of this new rule for the real estate sector, from the consequence of covid-19 on lease agreements and constructions, to delays in construction and supply chain problems caused by the war in Ukraine. Again, the parties are free to exclude this rule in their contract.
5. Exoneration clauses: another important change relates to limitation of liability clauses, such as liability caps. Three new rules in particular could have an impact on real estate contracts. First, a contracting party will no longer be able to rely on a limitation of liability clause if there is an intentional breach by a subcontractor. Contracting parties should therefore obtain the appropriate guarantees and securities from their subcontractors. Second, a contracting party will no longer be able to rely on a limitation of liability clause if damage is caused to the life or physical integrity of another person. This may impact, for instance, W&I coverage in certain cases. Third, subcontractors will automatically be able to rely on any limitation of liability clause obtained by the main debtor from the creditor. The main debtor may wish to consider excluding such a benefit in the agreement with the subcontractor.
6. Price reduction: another addition to the array of remedies available to contracting parties in the case of contractual breach, is the possibility to reduce the contract price. If a contracting party has only partially performed its contractual obligations, and the contractual breach is not sufficiently serious to justify unwinding the contract, a party may request a reduction in the price in court (or subject to judicial review, apply for the reduction unilaterally). While this is not a fundamental change to existing Belgian contract law, it does add to the strategic toolkit for disputing parties. Nullity: another new feature of the law is the possibility for the court to moderate the effect of nullity in the context of a contractual relationship. Confirming a recent trend in the case law, the new regime grants the court the express power to moderate the nullity sanction if nullity would not be proportionate to the breach of the relevant legal provision. This may be especially useful in the context of the nullity of a lease or sale agreement for a public law infringement, for instance as a consequence of the cancellation of a building permit, and provided that a new zoning procedure is ongoing. Many other causes resulting in nullity could be impacted, including the absence of a PEB certificate or zoning letter. However, the consequences should always be assessed on a case-by-case basis.
7. Nullity: another new feature of the law is the possibility for the court to moderate the effect of nullity in the context of a contractual relationship. Confirming a recent trend in the case law, the new regime grants the court the express power to moderate the nullity sanction if nullity would not be proportionate to the breach of the relevant legal provision. This may be especially useful in the context of the nullity of a lease or sale agreement for a public law infringement, for instance as a consequence of the cancellation of a building permit, and provided that a new zoning procedure is ongoing. Many other causes resulting in nullity could be impacted, including the absence of a PEB certificate or zoning letter. However, the consequences should always be assessed on a case-by-case basis.
8. Condition precedent: the law further amends when a condition precedent becomes effective. Under the new rule, a condition precedent takes effect automatically but only for the future. The article thus removes the retroactive effect of the condition. This means that under the new rule, a lease agreement will enter into force upon delivery of a final building permit for the future only and not retroactively as from the signing of the contract under the current regime. While this can have significant consequences (for instance, the rent would only be due as from that later date), most contracts already deviated from the old rule allowing the condition precedent to take effect from the moment it is fulfilled for the future only. The new rule will thus be in line with what is provided for under most contracts and SPAs.
9. Preference or option contract: the law also reinforces the effect of preference and pre-emption rights, as well as option agreements. In particular, a third party (typically, the entity purchasing the real estate asset in breach of the preference or option right) may see that its purchase is unenforceable against the beneficiary of the preference, pre-emption or option right, who will be able to pursue their rights notwithstanding the prior sale. This change – which confirms existing case law – means on the one hand, that the holders of such preference, pre-emption and option rights will be able to enforce these against third-parties (similar to some extent to the enforcement of in rem rights, such as ownership) and on the other hand, that any acquirer of a property should pay extra attention to the existence of such rights in the context of its due diligence. This regime should be read in parallel with recent changes in real estate law (book 3) pursuant to which the enforcement of the right will be subject to transcription (and therefore notarisation) of the preference, pre-emption or option right.
10. Transfer of claims and obligations: last but not least, for the first time the reform creates a comprehensive regime for the transfer of debts and contracts. While these operations will remain complex transactions under Belgian law, the existence of this legal framework will increase legal certainty and help parties to understand (and modulate) the effects of any transfer of debt or contract they would enter into, for instance the assignment of a maintenance agreement in the context of the sale of a building.