The real estate sector in times of Covid-19

6 January, 2021
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Covid-19 has affected every sector and industry in the world. Since the first contagion on November 17, 2019, in Hubei, Covid-19 has not stopped expanding and affecting the public, social and economic life of the entire world population. According to the digital version of the Spanish magazine, Muy Negocios & Economía, among the industries most affected by the impact of Covid-19 (global stoppage and subsequent restrictions) are the automotive, administrative, construction, retail, hospitality, tourism, and real estate sectors. These last four being the most affected during the last 12 months. 

Unlike the technology and digital industry, which have had growth and strong demand, the leisure, tourism, and fashion sectors have had to close their doors and to reduce their capacity. The real estate sector has seen its demand drop drastically, up to 77%. But that is not all, some contracts that were already arranged (before Covid-19), have been canceled. 

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Spain is one of the countries with the lowest real estate demand since the Covid-19 began in Europe. Followed by Italy and France, and very different from the situation of other European countries such as Germany, which heads the list of countries that have increased their demand and prices. In mid-December, El Diario de Ibiza published an article on the fall of up to 13% in the sale of homes in October. A few months before, the Ibiza Lawyers blog published a similar article on the impact of covid-19 on the sale of real estate. Apparently, in May, the negative impact that covid-19 would have on the Spanish real estate industry was already evident. 

The main reason is the high unemployment rate, Spain is the leader in unemployment in Europe, with a rate greater than 16%. Almost 4% more than the data registered at the end of 2019, when the unemployment rate stood at 13%. Some other reasons are the total or partial temporary reduction in working hours and salary reduction. The impact has been different in each autonomous community. According to the data published by the Diario de Ibiza, the greatest slip occurred in the Balearic Islands, Catalonia, La Rioja, and Madrid. The Balearic Islands is the most affected area. 

As mentioned above, not only has the demand decreased but the contracts that had already been agreed, have been canceled or have been frozen. According to the article published by Ibiza Lawyers, contracts without any type of advance are simply canceled. However, the purchase and sale with a deposit contract (earnest money agreement) are a bit more complicated since there is already money involved. The debate is clear, what happens with that money? Does the contractor (seller) keep it? is it returned to the buyer, who due to the current circumstances cannot continue with the purchase process? 

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According to article 1,091 of the Civil Code, an already established deposit contract cannot be canceled. That means that all these contracts must be fulfilled. However, there is an emergency exit if some extraordinary circumstances make it difficult (or impossible) to acquire the house. The principle rebus sic stantibus which means “things standing thus”, gives the possibility under some conditions to modify or cancel an earnest money agreement. This means that the earnest money contracts already established normally cannot be canceled or modified, as the two parties agreed considering their circumstances. However, there is an exception in case these circumstances are altered or no longer exist. 

The covid-19 itself is not a force majeure to cancel a contract, but the negative effects of the virus can be a reason for the buyer to choose or to be forced to withdraw from the contract. For example, and as mentioned above, the loss of employment, a considerably lower source of income, or/and the reduction of the temporary part or total working hours are some important factors to consider. 

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In order to apply the rebus sic stantibus in a earnest money agreement the Supreme Court established the following requirements: 

  1. Concerning the situation: this means that there must be a significant change in the circumstances that led to the signing of the contract. That is an alteration that could not be taken into account when signing the contract as it was not foreseeable.
  2. Concerning the degree of the situation: the situation must be a force majeure, that is, a situation that actually prevents compliance.
  3. Concerning the effects caused in the contract: the disproportion between the benefits, a result of this alteration of circumstances, must be exorbitant that they truly overturn the contract by annihilating the balance of benefits.

As we can see, Covid-19 has altered contracts, plans, and dreams. It is highly recommended to have professional support in case of a possible cancellation of a contract and make sure to comply with the requirements mentioned previously.