Delays of construction works due to tenant objections to notices to vacate

The proceedings

In collaboration with the municipality, a social housing association in a designated transformational areal (formerly referred to as a "hard ghetto") drafted a development plan aimed at reducing the proportion of social family housing to a maximum of 40%. As part of this plan, several existing housing blocks, including blocks A and B, were designated for demolition. These blocks were let out for residential units.

The development plan also included the construction of a new public school, with the municipality as the client, on the plots where blocks A and B were located.

The municipality issued a call for tenders for the school's construction as a turnkey project. At the time of the tender, the municipality and the housing association were still negotiating the purchase of plots. According to the tender documents, the turnkey contractor could expect that the two blocks on the northern plot would have been cleared before work commenced. During a later site inspection, the municipality's client adviser  assured the turnkey contractor that the process of vacating and demolishing the housing blocks was under control and would not affect the competition for the turnkey contract.

To partially implement the development plan, the municipality and the housing association agreed on a unified plan. Under to the unified plan, blocks A and B were to be demolished within the first six months of 2023, although the timetable did not account for "unpredictable situations, including legal proceedings related to notices to vacate".

Throughout the tender period, the municipality and the housing association continued to discuss the terms of the municipality's purchase of the plots. A draft purchase agreement was prepared but not signed, as the municipality saw no urgency in finalising the agreement while the tenants of blocks A and B had yet to vacate the premises.

On 31 March 2022, the municipality entered into a turnkey contract on planning and construction of the new public school and a leisure centre, adopting the terms of ABT 18. It was agreed that construction would begin in week 31 of 2023.

On 29 June 2022, the housing association issued notices to vacate to the tenants of the two residential blocks, requiring them to vacate the premises by 31 January 2023, in accordance with the demolition rules under the Danish Social Housing Act (almenlejeloven). However, two tenants objected to the notice, prompting the housing association to institute proceedings before the Rent Tribunal.

On 26 May 2023, the municipality informed the turnkey contractor that construction on the northern plot would be delayed, citing section 40(1)(b) of ABT 18 (extension of time due to acts of God). The delay was attributed to the pending Rent Tribunal proceedings against the tenants in blocks A and B, which prevented the municipality from gaining control of the site.

The turnkey contractor disputed the municipality's entitlement to an extension of time and argued that they were entitled to both an extension of time and damages/compensation for the prolonged construction period. They also sought additional payment for the changes in construction timing, claiming an extension of time in relation to several sanctionable terms The turnkey contractor based the claim for damages on Section 41(1)(a) of ABT 18 (circumstances relating to the client, and the client has committed an error or been negligent), in the alternative Section 41(2)(a) (circumstances relating to the client where the client has not committed an error or been negligent).

During the dispute, the municipality argued that the tenants' refusal to vacate the premises was an extraordinary, unpredictable, and rare situation comparable to "picketing", justifying extension of time. The municipality contested the tenants right to object under section 89 of the Social Housing Act did not  negate the extraordinary nature of the situation.

The municipality further argued that, although the housing association was their contractual partner, the obstacle they faced was similar to picketing – something beyond the control of both the municipality and the housing association.

Findings

The umpire, Niels Grubbe, a former Supreme Court Judge, stated in his findings that it was not uncommon that individual tenants exercised their statutory right to request a review of the legitimacy of the notice to vacate before the Rent Tribunal, even if a majority of the tenants had accepted the notice and had vacated the premises.

Based on this, the umpire concluded that the nature of the delay – caused by individual tenants objecting to the notice and the ensuing statutory judicial review before they vacated the premises – was not so uncommon that it could be compared to the circumstances described in Section 40(1)(b) of ABT (war, acts of God, fire, strike, lockout, picketing and vandalism).

The umpire emphasised that assessing the nature of the delay should not rely solely on the frequency of its occurrence. Frequency had to be evaluated in the context of how often the specific  delay occurs compared to potential instances of delay. For example, fire, strikes, and picketing could theoretically happen in any construction project, and the frequency would have to be evaluated against this, while the frequency of tenant objections as an obstacle to demolition would have to be evaluated against projects implying demolition following tenant displacement. Additionally, the risk of such a delay had to be considered in relation to the size of the built-up area, as the likelihood of objections increases with a higher number of tenants involved.

The fact that tenants objections were described as "unpredictable" in the unified plan of 21 May 2021 did not alter the assessment.

Regarding the turnkey contractor's right to damages, the umpire noted first that although the delay was caused by the municipality's supplier, the housing association, the delay in the contractual relationship between the municipality and the turnkey contractor must still be considered a circumstances relating to the client.

As the delay was not due to errors or omissions by the municipality, the umpire found that the delay was due to circumstances relating to the client without the client having committed an error or been negligent, see section 41(2((a) of ABT 18.

The ruling is published in EBB2024.157.

Plesner's comments

These days many social housing associations are implementing comprehensive redevelopment and renovation plans that involve issuing tenants notices to vacate.

This decision highlights the importance of housing associations allowing for the risk that tenants may challenge notices, potentially leading to lengthy judicial reviews, including appeals in multiple courts. When entering into agreements based on the assumption that the tenant will vacate the premises, housing associations must recognise the risk that tenants may refuse to do so. If several tenants are given notice at once, objections to the notices should be anticipated.   

If a housing association has entered into agreements with contractors, it may become liable for losses caused by delays that may occur if construction work is postponed.

Therefore, housing associations should plan for the possibility of an extended judicial review process, which could delay their project. This may be mitigated by including provisions in the contracts for delayed project start dates.

In this case, the municipality was found liable for damages under section 41(2)(a) of ABT 18. It covers delays caused by circumstances relating to the client (the municipality) where the client has not committed an error or been negligent. The turnkey contractor's claim for damages under this provision does not extend to lost profits.

Had the housing association been a party to the contract with the turnkey contractor instead of the municipality, its liability would have been calculated under section 41(1)(a) of ABT 18. This provision applies when delays are due to the client's error or negligence. In such a scenario, the housing organisation could be liable for expectation damages, meaning the turnkey contractor would be placed in the position it would have been in had there been no negligence. This would include compensation for documented losses, such as lost profits.

The decision serves as a reminder to municipalities, turnkey contractors, and other clients to be mindful of potential delays when tenant notices are part of an urban development or transformation plan. Turnkey contractors should in particular be aware that full compensation for losses sustained by the turnkey contractor may not be recoverable under the circumstances.

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Plesner's Social Housing team are specialised in social housing legislation, and we have broad experience with development of transformation areas, sale of social housing, creation of boundaries, and densification. We have thorough knowledge of the legislation relating to the social housing sector and the daily operation of social housing organisations, and we advise social housing organisations and private actors on developing and investing in the social housing sector.