Unable to perform your obligations under Sale and Purchase Agreement in light of the MCO: the justification and the alternatives
Published on 24 April 2020 by Lee Yun Zhi
As we all know, to staunch the spread of Covid-19, the Government of Malaysia has on 16th March 2020 announced the Movement Control Order (“the MCO”) to be in force for the period of 18th to 31st March 2020 and subsequently extended to 12th May 2020 (“MCO Period”).
This unprecedented MCO is leading to some parties being unable to perform their contractual obligations. As for example, under a Sale and Purchase Agreement (“the SPA”) relating to real estate assets, the seller may be unable to deliver vacant possession of the subject property to the purchaser or the purchaser is unable to pay the balance purchase price to the seller, within the stipulated time frame, resulting in some form of late charges or late payment interest payable by the defaulting party.
Generally, one may rely on the following two justifications for failure to perform the obligations provided under the SPA in light of the MCO:
(1) Force Majeure Clause: This is a provision which allows the non-performance of the obligations stated in a contract due to unforeseen events beyond control of the parties of the contract which prevents performance of the relevant contractual terms; and/or
(2) Doctrine of Frustration of Contract as provided under Section 57(2) of the Contracts Act 1950: Generally this doctrine will apply when an obligation becomes physically or commercially impossible to be performed or it will be illegal if it is so performed.
We have discussed in depth the abovestated justifications in our other article, which can be found in our firm’s website/ facebook page via the link below:
In this article, our main focus of discussion would be relating to real property transactions, direct purchase from the Developer and purchase from secondary market (‘Subsale’) as to whether the justifications mentioned above are applicable.
1. Direct Purchase from the Developer
1.1 The SPA prescribed by the law (HDA)
If you are purchasing residential properties, the SPA is a standard agreement under the Housing Development (Control and Licensing) Act, 1966 and the Housing Development (Control and Licensing) Regulations, 1989 (“the HDA”). Basically there are two ways a Developer might be able to procure extension of time: (a) the assistance and/or approval from the Minister or alternatively (b) by way of a Supplemental Agreement or Settlement Agreement signed by the Purchasers to allow extension of time for delivery of vacant possession with a waiver of their claims for Liquidated Damages. For those who are interested to know more on this, we have discussed in depth on this in another article from our firm’s website/ facebook page via the link below:
On the other hand, if a purchaser is unable to pay the progressive billings in light of the MCO, are there justifications for such failure from the SPA or from the law? The immediate answer to the question above is unfortunately a NO. First of all, the timeframe for payment of progressive billings as provided under Clause 10 of the standard SPA from the HDA is 30 days, not 30 working days. Furthermore, there is no force majeure clause in this standard SPA. However, if one is taking financing for such purchase, it can be argued that the Doctrine of Frustration is applicable here because despite the banks/financial institutions being allowed to operate during the MCO Period, the related non-essential businesses and services, like the offices of the lawyers, the Commissioners for Oaths, the Government’s agencies such as the Land Office, the Inland Revenue Board, the Courts are closed. As the financing/loan documents cannot be effectively affirmed, stamped or endorsed or filed with the relevant Government departments, the banks/financial institutions will not release the loan towards payment of the progressive billings.
1.2 Not HDA prescribed SPA
If one purchased a non-residential property from the Developer, which is not regulated by the HDA, such SPA would usually have a force majeure clause, which may read as follows:
“The Vendor shall not be liable in any manner and delay in the completion of the Building or any failure by the Vendor to fulfil any of its obligations hereunder is due to or caused by acts of God, force majeure, strike, lockout, riot, civil commotion, acts of war, enemy action, loss or damage by fire, flood, tempest or the Vendor’s inability for reasons beyond its control to obtain any necessary sanctions and approval of any appropriate authority/ies or any other reason beyond the Vendor’s reasonable control.”
The abovestated example clause would be wide enough to cover the MCO situation and the Covid-19 pandemic as it covers varied reasons beyond the Vendor’s reasonable control to fulfil the Vendor’s obligations provided under the SPA.
However, such force majeure clause is merely protecting the Vendor/the Developer and there is no protection for the Purchasers if they fail to pay the progressive billings and/or the balance purchase price in accordance with the SPA. The Purchasers will need to argue based on the Doctrine of Frustration as explained above.
If the SPAs for subsale contain a force majeure clause, it would usually cover only the incidents of damage or destruction of the property by acts of God and/or other unforeseen circumstances.
The effect of a force majeure clause in a contract is different from that in another because it is based on the wording, contractual terms, facts and circumstances of each contract. It is pertinent to read the contract and interpret the force majeure clause whether a party shall or shall not be liable to the other party for any loss, damages, or delay whatsoever suffered due to the MCO and the Covid-19 pandemic which are not reasonably foreseeable.
In most of the SPAs for subsale, the Purchaser shall pay the Balance Purchase Price within three (3) months from the date of the SPA but subject to extension of time free of interest in favour of the Purchaser in the event the delay is caused by the Vendor and/or the Vendor’s Financier. In the event this MCO indirectly results in a delay on the part of the Vendor and/or the Vendor’s Financier, the Purchaser shall be granted an extension of time free of interest in accordance with the relevant clauses of the SPA. However, if there is no such specific clause to allow an extension of time free of interest in light of this MCO and/or Covid-19 pandemic, the parties shall renegotiate in good faith to allow more time for the Purchaser to pay the Balance Purchase Price and/or to complete the SPA.
In the event the Balance Purchase Price is fully settled during the MCO period, the parties will be facing the challenge of the delivery of vacant possession within the time frame as stated in the SPA. Usually the time frame provided is based on working/business days and we are of the view that the period of the MCO shall be excluded from the calculation of working/business days as law firms are not allowed to operate as usual. The other justification will be the doctrine of frustration, if delivery of vacant possession is made during the period of the MCO, it will be a breach of the regulations under the MCO as this is not one of the purposes allowed for one person to move from one place to another during the period of the MCO.
3. Possible Intervening Measure?
Currently there is no law or regulations that automatically excuse or allow non-performance of contractual obligations by parties due to the MCO and therefore we are hoping that the Government of Malaysia will follow the footsteps of Singapore in passing a legislation similar to “Covid-19 (Temporary Measures) Act 2020 (Singapore)” which provides a “legal shield” protecting all contracting parties from legal consequences arising from their failures or inabilities to perform their contractual obligations and/or to allow time to remedy or rectify such deficiencies and/or breach of contract during the lockdown period in Singapore.
In this respect, the Real Estate and Housing Developers’ Association (Rehda) Malaysia has urged the Government to introduce an all-encompassing force majeure exemption bill or a Covid-19 (Temporary Measures) Bill to lawfully protect all parties to any contract from being deemed to be in breach of the contract due to the inability to perform any obligation of the contracts during the MCO period. In the event the Government takes heed of this call, then such new law and/or regulation will serve as a ‘non-performance shelter’ for contracts during the MCO period, whereby the contracting parties’ performance of the contract will be dispensed with or excused under the new law and/or regulation.
4. Other Alternatives if contracting parties are unable to perform the contract:
In the absence of new law/regulations to be introduced to specifically address this grey area, the contracting parties may wish to negotiate in good faith to overcome any contractual stalemate arising from non-performance of contractual obligations during the MCO period, such as the following:
(1) Supplemental Agreement: In light of the MCO and/or the Covid-19 pandemic, if the contracting parties are unable to perform their initial contract, it is prudent for them to renegotiate the terms of their contract and they may consider varying the terms of their initial contract by entering into a Supplemental Agreement.
(2) Settlement Agreement/Deed of Revocation: The contacting parties may terminate their contract and/or suspend their contractual obligations as a result of the Covid-19 pandemic by a Settlement Agreement and/or Deed of Revocation.
Unforeseeable and unavoidable events such as the current situation of Covid 19 now, regrettably do happen. In short, we have to rely on the wording of the contract and also the circumstances as to whether one party can be held liable for breach of contract in light of such party’s failure to perform the contract during the MCO period. You may consult us for legal advice if you need any explanation regarding your contract. We will also suggest the remedies available such as for the parties to enter into a Supplemental Agreement and/or Settlement Agreement and/or Deed of Revocation as mentioned above.