The collapse of the property market, and the arrival of the credit crunch, caused major difficulties to many property developers and would-be buyers. In response, some argued that such unexpected circumstances could amount to ‘frustration’, and so end contractual obligations. That argument has, however, been given short shrift by the courts (as confirmed in Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 323 (TCC), noted in last month’s issue at p16).

However, while it may amount to being wise after the event, it is worth considering whether there are some lessons that might be learned for the future, so as to anticipate the situation if there are further unexpected credit problems.

One approach is to make express provision in the contract allowing termination for specified events, which could include any ‘material adverse change’ (a ‘MAC clause’). Such clauses are commonly used in company acquisitions, so as to allow a buyer to walk away between signature and completion if unexpected events occur that result in the target losing value, and they are also used in loan agreements to allow a lender to call a default if there is a significant threat to the borrower’s ability to repay or to the value of any security (eg as a result of a large fall in the company’s trading performance or a significant decline in its market). Such clauses can also be used in property purchases to deal with the period between exchange and completion. In principle, therefore, a MAC clause may appear to provide an easy way out of a contract for a party in times of economic turmoil. But, the legal reality is far less certain because there have been virtually no cases in which clauses have been upheld in those circumstances (and such cases have always been heavily dependent on their facts). Moreover, a party that wants to rely on a MAC clause will have to ensure that the clause is sufficiently precise so as to define the change of circumstances when it will apply. In practice, that can be surprisingly difficult. Indeed, the fact that banks remain reluctant to rely on MAC clauses when calling a default, and usually rely on other more tangible events of default, indicates that they do not necessarily regard such clauses as a reliable way of getting out of a contract when there are troubled times. However, it does not follow that MAC clauses should necessarily be rejected as a way of dealing with unexpected economic turmoil; a properly drafted clause could give rights of withdrawal, and, at the very least, might give a useful negotiating lever in that situation. Source: Barlow Lyde & Gilbert.