Coronavirus: extending the deadlines on suspensive conditions

Many development agreements and land acquisition agreements contain suspensive conditions setting out deadline dates for certain events to occur or actions to be taken.

To take a typical example, the developer must:

1. within three months of signing the agreement, confirm that it is satisfied with a Site Investigation Report in relation to the subterranean ground conditions.Due to the lockdown, geotechnical engineers are unable to carry out intrusive bore hole tests on site and have the samples analysed. The three-month deadline will be missed.
2. within six months of signing the agreement, submit a planning application for its proposed development scheme and, within 12 months after that, secure a satisfactory planning permissionAlthough it may be possible to submit a planning application, the planning authority may not register the application or be able to neighbour notify; furthermore, certain planning authorities have delayed their recent planning committee hearings until autumn

What can developers do about deadline dates passing during lockdown?

Developers have become used to the risk of a looming deadline date passing before they can comfortably serve notice to purify a suspensive condition, particularly in relation to planning permission, and often the contract will extend that deadline if a planning decision or an appeal decision is awaited. However, rarely will there be a general extension provision for “circumstances outwith the developer’s control”, such as the Covid-19 pandemic.

The danger, of course, is that if a developer does not drop the suspensive condition by the relevant deadline, the seller is usually entitled to withdraw from the agreement and perhaps retain a healthy up-front deposit payment. That is galling for a developer if it happens in ordinary times but if it occurs because of the lockdown, that is inherently unfair as neither party is at fault but one party suffers more than the other.

An answer may be to hand in terms of the well-established concept of frustration. The concept is the common sense recognition that a contract can become impossible to perform if an event occurs which is completely outwith the control of either party. In those circumstances, it would be unfair to expect the parties to meet their impossible obligations or, to be liable in damages for breaching them.

Frustration in this sense is not where a contract becomes more difficult to perform or even loss making, it has to be genuinely impossible. The European Medicine Agency found that last year when they lost their case claiming frustration of their 25-year lease of an office in Canary Wharf due to Brexit …

As far as timescales for suspensive conditions are concerned, it is fair to say that events and actions are being delayed by the Covid-19 lockdown through no fault of either party and the equitable position is for (temporary) Frustration to extend deadline dates for the prescribed actions or events by the Covid lockdown period or such other demonstrably reasonable longer period.

The principle is fair and, indeed, almost 100 years ago the Court of Session had to consider Frustration due to a mini-lock down imposed by the Air Authority that no “vehicle, animal, vessel, aircraft or thing” was allowed in an area where the RAF were practising, which interfered with the operation of a salmon farming business.

The effect of Frustration is that the contract is brought automatically to an end on the occurrence of the frustrating event, whether that suits the parties or not. Both parties are then released from further performance of their obligations.

Getting a signed agreement with the seller is vital

While the legal doctrine of Frustration is a useful concept, it’s a blunt instrument to end a contract. Given the significant sums at stake for developers, it is key that any exposure created by the lockdown with suspensive condition deadlines are addressed in a signed variation agreement and that silence, informal correspondence or certain behaviours are not assumed by the developer to have a contractual footing. Sellers should recognise the Frustrating effects of the lockdown and agree to sign agreements that extend the deadlines, vary parties’ attendant obligations and cater fairly for delays in statutory processes or approvals where there are inevitable and unavoidable backlogs.

Refusal to do so in these extraordinary times may lead to developers’ seeking fair treatment through court action.

Get in touch – we’re here to help

We advocate an early approach to the seller or other contracting parties to any development agreement or land acquisition contract and, would be glad to assist you in dealing with that from start to finish.