Beyond the crisis: adjusting contracts based on unforeseen circumstances

The economy is booming, including the real estate industry. Home prices are rising monthly, and commercial real estate is now also picking up solidly. This is affecting long-term contracts signed during the crisis.

I would point to leases concluded several years ago in office or retail locations that were vacant at the time, but are now in high demand. One can also think of purchase and construction agreements that were concluded during the crisis, but now need to be executed. Characteristically, these are contracts that were agreed upon in a period of relative abundance with regard to labor, materials or space, but which must be executed in a period of scarcity thereof. That pinches, sometimes so badly that execution becomes loss-making or even impossible.

The question is whether and, if so, to what extent, such contracts can be modified at the demand of one of the contracting parties.

Specific legal regulations

A number of specific legal regulations offer the possibility of having a contract modified based on changed circumstances.

For example, for the lease of retail space (so-called "290 business premises"), it is possible to claim an adjustment of the rent if it appears that this rent does not reasonably relate to the rents of comparable stores in the neighborhood ("reference rents"). Such a claim can in principle be brought after (at least) five years from the commencement of the lease, based on an expert's rental advice.

In addition, a specific regulation for cost-increasing circumstances applies to contracting work. If, after the conclusion of the building contract, cost-increasing circumstances arise (or come to light) that cannot be attributed to the contractor and the contractor did not have to take them into account when determining the contract price, the court can adjust the contract price to the cost increase at the contractor's request. Incidentally, many building contracts have certain general conditions declared applicable, such as the UAV(-GC), which includes a specific regulation on cost-increasing circumstances. When applying such a contract, as a rule there will be no unforeseen circumstances.

Other contracts in the field of real estate, such as leasehold, tenancy and building rights, also have specific provisions modifying the content of the contract or right in rem in question.

Unforeseen circumstances

In addition to these specific regulations, the law has a more general provision, which includes the following where relevant:

"At the request of one of the parties, the court may modify the consequences of a contract or dissolve it in whole or in part on the basis of unforeseen circumstances of such a nature that the other party may not, according to standards of reasonableness and fairness, expect the contract to be maintained unchanged. The amendment or dissolution may be given retroactive effect.

2. An amendment or rescission shall not be pronounced insofar as the circumstances are, by virtue of the nature of the contract or generally accepted practice, for the account of the person invoking it."

By using the term "unforeseen circumstances" the legislator intended to indicate that it is not a question of what the parties or one of them could have foreseen, but whether the parties have explicitly or tacitly discounted the possibility of the occurrence of these circumstances in the contract in question. The latter means that the contract provides for this occurrence. If this is the case, there are no unforeseen circumstances.

The court can modify a contract or dissolve it in whole or in part on the basis of unforeseen circumstances of such a nature that the other party cannot expect the contract to be maintained unchanged according to standards of reasonableness and fairness. According to established case law, a court must exercise restraint on this point. Only circumstances that are truly exceptional are considered "unforeseen." Moreover, by virtue of the nature of the contract or generally accepted practice, the circumstances must not be for the account of the party invoking them.

Economic conditions

It follows from case law that economic circumstances in general, such as a (suddenly) worsening economic tide, are almost never considered unforeseen circumstances.

Illustrative is a somewhat older case at the Zutphen District Court from 2009. It concerned the purchase of an investment property worth EUR 1,200,000. After the credit crisis broke out, the property was valued at EUR 800,000. The buyer did not want to perform and argued that as a result of the credit crisis, his plans for the property were no longer feasible and that unchanged performance of the contract could not be required of him. However, the court considered:

"A fact of common knowledge is that the economy in general and the real estate market in particular are subject to fluctuations. Periods of economic prosperity are interspersed sooner or later with economic downturns. Periods of rising house prices alternate with stabilizing or even falling house prices. Therefore, when the economic situation worsens at a certain point and/or house prices fall, it cannot be said to be a truly exceptional situation. This means that such a change does not qualify as an unforeseen circumstance within the meaning of the aforementioned provisions, even if the changes are substantial."

In addition, the court found that the risk of price increases after closing a sale is borne by the buyer according to common sense.

Only in the event of specific economic circumstances, such as violent price fluctuations in partial markets, can a claim for unforeseen circumstances succeed. In early 1993, for example, a number of waste paper dealers and the Roermond local council had agreed that they would buy the waste paper offered by the council at 3 cents per kilo. In mid-1993, the price of waste paper dropped considerably. The court ruled that a certain price fluctuation belongs to the scope of risk of the paper merchants as professional parties, but that they had not taken the extent of the price drop into account when concluding the contract. Thus, the court viewed that price drop as an unforeseen circumstance.

A case that came before the Zwolle-Lelystad District Court in 2012 involved a 600% price increase within a few months for magnets for the purpose of delivering wind turbines. The interim relief judge was of the opinion that although the parties had factored some price fluctuations into their agreement, it was not of such magnitude. Accordingly, the interim relief judge ruled that the invocation of unforeseen circumstances was well founded.

Conclusion

Where work has been contracted for in times of plenty and must be performed in times of scarcity, or vice versa, large price differences can occur. In real estate contracts, one might think of the price at which a job is contracted and/or prices of materials and labor, or the price at which a property is purchased or leased. This can pinch, such that there is a need for adjustment.

In renting retail space and contracting work, specific regulations apply that allow price increases or decreases to be enforced. If these regulations do not apply, only unforeseen circumstances can be invoked.

Case law shows that such an appeal almost never succeeds if reference is made to the economic climate in general. Only in the case of concrete and very exceptional price fluctuations in a submarket can the court, under circumstances, pronounce an amendment or dissolution of the contract in question. It is therefore advisable to make clear agreements in contracts to be concluded for certain circumstances, such as a changing economic climate.