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COVID-19 AND REAL ESTATE TRANSACTIONS IN NIGERIA

1.    INTRODUCTION

The real estate industry, like the stock market, is a major store of value and one of the most thriving sectors of the Nigerian economy. Generally, the real estate sector is supported by the land tenure system in Nigeria and regulated by section 45 of the 1999 Constitution of Nigeria as well as the Land Use Act, 2004. The Constitution guarantees the fundamental human rights of citizens to freely aspire, hold and dispose of property in Nigeria, the Land Use Act provides specifically, that all lands in the state are owned by the Governor who holds same in trust for the people.[1]

Chief among the reasons individuals lease land from the Governor is to harness profit from the property. The National Policy on Housing and Urban Development led to the reposition of real estate activities in Nigeria to foster public-private partnerships. In recent times, the private sector which includes commercial banks and property developers has provided immense contribution to the real estate sector of the economy. Sales adverts for property in different forms are now as common as sale adverts for consumables with estate after estate cropping up to fill the homeownership gap.

Fast forward to 2020 and the offensive intrusion of the coronavirus (COVID-19), businesses are shutting down and our commercial landscape is changing rapidly, such that investors are seeking investment alternatives that are either immune to the crisis or have the propensity to thrive after the pandemic, the real estate sector is not exempted from the impact of COVID-19 and this article aims to analyse the legal impact of the pandemic.

2.    IMPACT OF THE COVID-19 PANDEMIC ON REAL ESTATE INVESTMENT

Globally, countries have experienced a reduction in national income caused by the immobility of persons beyond national borders. For instance, the World Bank reveals that growth in Sub-Saharan Africa has been significantly impacted by the outbreak and is forecast to fall sharply from 2.4% in 2019 to -2.1% to -5.1% in 2020; the first recession in the region over the past 25 years. Furthermore, countries largely dependent on the income received from worldwide visitors, such as the UAE, Tanzania and Mauritius have experienced a fall in investment in real estate as construction projects are on halt and property leasing has significantly reduced.

In Nigeria, the impact of COVID-19 on real estate investment is multifarious hitting from the very root of property development. As China is one of Nigeria’s major importers of cost-efficient products (building materials inclusive), the embargo on movement beyond essential services has negatively affected the building and construction of properties in Nigeria.

Potential investors are also reluctant to invest or bankroll previously agreed construction deals or even new deals due to the instinctive need to conserve resources owing to uncertainties in the wake of the pandemic.

The hospitality sector is the worst hit as hotels, guest houses and leisure short term lets are largely unoccupied leading to loss of income.

Property owners are faced with a likely reduction of rental income as they are nervous that tenants are likely to struggle to make rental payments if at all. With a sharp increase in the loss of jobs and salary cuts, tenants are constrained to suspend rental payments even as food and hygiene expenses take superseding priority.

In the light of the evolving circumstances and the fear of a second wave of the pandemic, some of the practical questions are – how can principal stakeholders to a real estate transaction address the occurrence of a breach of contract or loss of profit? What is the probable position of the court on breached obligations in real estate transactions?

3.    LEGAL CONSIDERATION FOR STAKEHOLDERS

In the case of a breach of contract, the Force Majeure clause in the contract between the parties may be explored in response. A force majeure event is an intervening event that affects the capacity of the contracting parties to fulfil their contractual obligations. The Nigerian Court of Appeal defined force majeure as something unexpected and unforeseen happening, making nonsense of the real situation envisaged by the parties.[2] Expectedly by this definition, a defaulting party must prove that the pandemic was not envisaged and that the terms of the contract could not have been fulfilled in the reality of the pandemic. Ordinarily, however, the force majeure doctrine would not grant automatic termination of the transaction unless the parties have agreed that the contract would be deemed terminated if the force majeure event continues for a defined period.

Therefore, it provides a defence for the defaulting party and allows both parties to objectively appraise the effects of the pandemic on the contract and determine if same should be suspended for some time or all together brought to an end. This is seen in the case of a prospective corporate tenant from the US who has entered into a lease agreement for 3 years for an office space in Lagos, Nigeria. The tenant may find a defence in the force majeure clause where the tenant is unable to take possession due to US and Nigerian flight restrictions. Nevertheless, it should be stated that the tenant will be in a better situation if the consideration had not been paid as opposed to requesting a refund of the consideration from the landlord.

Conversely, where a force majeure clause is lacking in a contract or there is no written contract, the doctrine of frustration may be exercised. Frustration is the premature determination of an agreement owing to the occurrence of a supervening event or change of circumstance so fundamental that it is regarded by law as striking at the root of the agreement.[3] For frustration to be successfully pleaded it must be proven that one or both parties cannot, due to the COVID-19 pandemic, perform their contractual obligations. Where the court agrees and finds that frustration has occurred, two things happen.

Firstly, the contract is discharged and both parties are relieved from any future obligations.[4] Secondly, all obligations that had accrued from the beginning until the frustrating event are valid and must still be met.

In addition to the above-highlighted defences to a breach of a real estate contract, the issue of estoppel gained reputation in the High Trees case.[5] The focal point for determination in the case, was whether or not the promise by a landlord to reduce the rent by half in 1945 (during the war period) was sufficient to relieve tenants of paying the full rent post-war seeing as they furnished no consideration to bind the landlord on his word. This estoppel principle was then formulated to the effect that provided the promise was duly made by the landlord and was acted upon by the tenant who had altered his position with reference to the landlord’s promise, then the altered position amounts to consideration. Thus, without the need for more, the promise was binding on the landlord and he could not change his mind.

The fact of the case is similar to the position of many landlord-tenant relationships during the pandemic. For many monthly tenants, rents may be put on hold to relieve tenants of the financial hardship that follows a global pandemic. Post-pandemic, courts may be compelled to determine what remedy will be available to landlords who intend to collect arrears of rent after the restrictions have been lifted and similarly determine if a plea of promissory estoppel would suffice.

For yearly tenants however, the circumstances are different.  The landlord is unlikely to suspend payment of rent if the tenancy expires much later in 2020 or in 2021 as he would assume a sufficiency of time to enable the tenant surpass or recover from the impact of the pandemic. However, if the rent is due during the lockdown or soon after, the landlord may extend the due date for the rent. It is doubtful that the Landlord will waive the payment of rent for a full year or even for a couple of months without statutory intervention. However, discounts on the rent may be explored. The position of the court in High Trees case may also apply to landlords who turnaround to demand payment of waived rent.

4.    RECOMMENDATIONS

The myriad of issues considered in real estate contracts during the COVID-19 pandemic cannot be resolved with the same strategies as other contracts where force majeure, frustration, estoppel or an Act of God are easily proven.

The solution for all stakeholders in the real estate sector would involve a thorough adjustment of terms by all parties involved – e.g. the investor, financier, property developers, property owners, tenants, suppliers of goods and services and estate agents.

Already, construction projects have been hit by the social distancing guidelines which may be plausible or otherwise, but in no doubt will cause difficulties and delays on the project. An option at resolution is for parties to reassess the impact of the pandemic in the coming months and by that, renegotiate the contract terms with the parties involved to include an extension of time for completion with no or minimal contractual penalties. It would, therefore, be wise to also insert clauses on alternative dispute resolution mechanisms especially where there are multiple or foreign investors. This would prevent full-blown litigation that may cripple the entire project.

For uncompleted contracts of assignment of property, parties are advised to seek legal advice on the revision of terms of the contract of sale. Specific terms that may be revised include the consideration clause, the possession before completion clause and completion clause. It would not be tenable as an argument in law, if consideration or rent is increased unilaterally – that is by one party alone, using the pandemic as an excuse.

Furthermore, property owners must be careful in permitting possession before completion by the purchaser/lessee as enforcing ejection in the case of the purchaser/lessee’s default may be difficult and rather unpleasant.

While for tenants, a smart way to avoid being subject to litigation after the pandemic would be to have in writing i.e. have a lawyer prepare a simple agreement or addendum to an existing agreement detailing concessions proposed by the landlord in view of the pandemic. If a reduction in rent is considered or a waiver thereof and it is expected to last for the time being, it should be clearly and explicitly stated in writing.  

5.    CONCLUSION

Essentially, this period demands a revision of contractual terms to reflect the increasing economic and social changes that come with the COVID-19 pandemic. This is not only fair to both parties but aims at sustaining the contractual relationship albeit with unavoidable inconveniences. Nevertheless, disputes will still arise regardless of efforts to avoid same as some parties will attempt to take advantage of the pandemic to get ahead of the other party whilst others will care less of the impact of the pandemic on the other party.

Gbemisola Mosuro

Ifeoluwa Gbarada

Ifeoluwa Okunmadewa

For more information or questions on this article, please send an email to contactus@tundeadisa.com


[1] S1 of the Land Use Act 1978

[2] Globe Spinning Mills (Nig) Plc v Reliance Textile Industries Ltd (2017) LPELR-41433 (CA) 27 para. E

[3] Mazin Engineering Ltd v Tower Aluminium (Nig) Ltd (1993) 5 NWLR (pt 295) 526 cited in Wema Bank Plc v Alhaji Sola Oloko (CA/1/88/2009) [2014] NGCA 3

[4] Addax Petroleum Development (Nig) Ltd v Loycy Investment Co. Ltd. & anor (2017) LPELR-42522 (CA) 10-12 para. E-F

[5] Central London Property Trust Ltd v High Trees House Ltd (1947) KB 130; also in Ajayi v Briscoe (1964) 1 WLR 1326

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