Impact of the B2B law on real estate contracts
The Law of 4 April 2019 concerning the abuse of economic dependence, unfair clauses and unfair market practices in B2B relations (the “B2B Law”) introduces a prohibition on 'unfair clauses' in contracts between enterprises. This B2B Law prohibits each clause which, separately or together with other clauses, creates a significant imbalance between the rights and obligations of the parties. Only the 'core clauses' of a contract are not subject to this scrutiny provided they are written in an intelligible and clear way (transparency test).
The B2B Law furthermore includes a black list (4 clauses which are irrefutably deemed to be unfair and therefore prohibited) and a grey list (8 clauses which are presumed to be unfair but the presumption can be refuted). Please see our page New rules in B2B relationships for further general information on the B2B Law.
The question arises: what will be the impact of the B2B Law on real estate contracts?
Application of the B2B Law to real estate contracts
Real estate contracts between businesses do not escape the application of the B2B legislation: they are also subject to the B2B Law. Consequently, all kind of real estate agreements, such as purchase agreements, lease agreements and construction agreements regarding real estate assets, are all subject to the provisions of the B2B Law if they are entered into between enterprises. The B2B Law only excludes (i) agreements relating to financial services and (ii) public procurement agreements (or agreements executed in the framework thereof (e.g. agreements with subcontractors) from its scope.
The protection offered by the B2B Law is not limited to small and medium-sized companies, nor is a relationship of 'dependency' required. Consequently, real estate companies who contract with other real estate professionals will have to comply with the new law, regardless of the companies’ size or the value of the transaction.
Impact of the B2B prohibition on ‘unfair clauses’
Before analyzing some relevant clauses on the black list and the grey list of the B2B Law from a real estate perspective, it should be reminded that these lists are not the only test. Each provision in a real estate contract subject to the B2B Law can be challenged based on the general significant imbalance test (except for core provisions provided they meet the transparency test).
Black list clause on unilateral interpretation
Clauses giving a party the right to unilaterally interpret a contractual provision will be unlawful. Granting a party the right to unilaterally determine a right or obligation of the other party remains lawful (the so-called “partijbeslissing”).
The precise scope of this prohibition is highly uncertain. All clauses with ambiguous or unclear wording that grant certain rights to a party to decide on a certain item without reference to objective criteria may fall under the scope of this prohibition, e.g. the right for the principal not to grant the provisional acceptance relating to a building in case of “material” snag items without defining the term “material”.
We strongly recommend to use clear definitions and unambiguous wording in real estate contracts, to avoid broad and general wording when granting certain unilateral rights to a party, and to make these rights subject to objective criteria.
Black list clause on irrefutable knowledge or acceptance
Clauses that aim to irrefutably establish a party’s knowledge or acceptance of terms of which that party did not have actual knowledge before the conclusion of the contract are prohibited. Consequently, clauses in a private sales agreement (“compromis”) providing that the purchaser irrefutably accepts all special conditions encumbering the real estate asset without having provided these special conditions to the purchaser or without the purchaser having had the opportunity to take note of those special conditions before the conclusion of the agreement might be considered as unlawful.
Note that clauses containing refutable presumptions are allowed. Moreover, in Belgium, notaries have the legal obligation to verify the special conditions and other encumbrances regarding the real estate asset prior to the enactment of the notarial deed. In principle, they will be mentioned in the notarial deed itself.
Grey list clause on unilateral amendments
Clauses that aim to give a party the right to modify, unilaterally and without a valid reason, the price, characteristics or terms of the contract are presumed to be unlawful. Clauses allowing a party to unilaterally determine – which is not the same as modifying – a right or obligation of the other party (the so-called “partijbeslissing”) therefore do not fall within the scope of this ‘grey clause’.
Some construction agreements grant the contractor the right to unilaterally modify the unit prices of certain materials. In case the agreement does not provide objective criteria or ‘valid’ reasons for the contractor to change the unit prices (e.g. unexpected scarcity or increase in the price of raw materials), such clauses will be presumed to be unlawful.
We therefore recommend to mention, for example, objective criteria or ‘valid’ reasons that gives such party the right to change certain conditions of the agreement or to add precisions that the counterparty is deemed to have accepted in the absence of any protest within a defined (reasonable) period of time.
Grey list clause on tacit extension or renewal without reasonable notice period
Clauses that aim to tacitly extend or renew an agreement of definite term without providing a notice period or reasonable notice period to the counterparty, are presumed to be abusive.
It is common practice in Belgium that, if a lease agreement includes a tacit lease extension or renewal of the agreement, such lease extension or renewal takes place unless a party has given a prior written notice, i.e. opposed against such renewal or extension. We recommend to provide a reasonable period of time during which the other party can oppose to the tacit lease extension or renewal. Whether or not a notice period is ‘reasonable’ depends on the circumstances of the specific case, e.g. the initial term of the (lease) agreement, the nature and location of the leased premises etc. Both notice periods that are too long and those that are too short are presumed to be unfair.
Grey list clause on reversal of economic risk without compensation
Clauses that aim to place, without compensation, the economic risk on one party, where that risk is normally borne by the other party or by another party to the contract are presumed to be abusive.
The clause itself raises several questions: how to distinguish between an economic risk and legal risks, how to determine which party should normally bear a certain risk, does any compensation suffice to justify a shift of risk or should it be a reasonable compensation? All these questions are left to legal authors, practitioners and case law. Neither the B2B Law nor its parliamentary preparatory works offer any useful guidance.
For instance, asset purchase agreements often contain representations and warranties, specific indemnities and/or exoneration clauses related to the (characteristics and compliance of the) real estate asset. Also lease agreements often contain exoneration clauses. Are the risks covered by these clauses, economic risks as they have a financial impact or mere legal risks? Who should normally bear these risks: the seller or the purchaser? What type of compensation could justify a shift of these risks?
To minimize the risk, you may consider including a clause that stipulates that the parties acknowledge that the allocation of the (economic and legal) risks in their agreement is not done without compensation.
On 1 December 2020, the new rules on ‘unfair clauses’ in contracts between enterprises will enter into force. They will apply to contracts concluded, renewed or modified after that date.
Therefore, do not forget to keep the B2B Law in mind when drafting real estate contracts. If you have any question or want assistance in drafting or reviewing your real estate contracts, do not hesitate to contact us.
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