COVID–19 And Lease Agreements: Can I Take A Break from Lease At Least?

25
May 2022

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The Decree on Organization of Work of Employers During the State of Emergency, issued by the Government of the Republic of Serbia due to COVID-19, caused a massive evacuation of the leased workplaces. Lessees started seriously asking themselves: Am I still obliged under the law and/or the lease contract to pay the rent in this situation when I do not use the commercial premises anymore due to the state of emergency?

Namely, COVID-19 has merely oriented both lessee and lessors to two legal institutes (further explained in the text COVID-19 and Contracts: This Is Why You Will Be Reading Them More Carefully After the Pandemic):

1. Force Majeure

2. Hardship (usually also called “Rebus Sic Stantibus” or “Change of Circumstance”).

FORCE MAJEURE WITH LEASE

Force majeure is defined as the impossibility to perform contractual duties due to an event not attributable to either party. Most contracts have provisions that further explain what is considered force majeure for that contractual relationship, as well as what the consequences of such inability to perform contractual duties are. Having a state of emergency due to COVID-19 does not necessarily mean that one could invoke force majeure. It will depend on the situation. On top of that, the majority of, particularly, lease agreements usually lack such a boilerplate clause, which means that the parties should look for the answers within the governing law of the contract.

Force majeure means that there is an absolute inability for the lessee or lessor to perform their contractual obligations.

For example, the obligation of the lessor could be to hand over the leased commercial premises in a building to a lessee. Before the handover date stipulated in the lease contract the state ordered that the building in which the leased space is located must be closed due to the safety measures. If that building is closed by the Government order, that constitutes the impossibility for the lessor to hand over the leased space and thus fulfill his contractual obligation. However, these situations are not so common.

On the other hand, the majority of lessees have directed their employees to work from home, in order to comply with the above-mentioned Government’s Decree, resulting in numerous leased workplaces becoming empty. However, some lessors have still been requesting their lessees to pay the rent. The problem with the application of the force majeure in described situation lies in the fact that in most cases, the buildings themselves, in which the employers conduct their business activities, have not been shut down by the mandatory decision of the respective authorities. In other words, most of the lessees have not been absolutely disabled to use the leased workplace, and thus the existence of the force majeure would be hard to prove. The situation is different when it comes to shopping malls, whose work has been explicitly forbidden by the authorities.

To sum up, in cases when a governmental decision (such as the Government’s decision adopted during the period of a pandemic) directly causes the inability of one party to perform its contractual obligation, that party has the possibility to invoke force majeure. However, it depends on the particular situation.

HARDSHIP

(Change of Circumstances)

This legal institute is applicable when the fulfilment of the contractual obligation has become difficult– but not entirely impossible (if it is impossible – it is a force majeure). In this case, one party is struggling to perform its contractual obligation due to some unpredictable event. Precisely, such struggle in a performance opens a key question when it comes to a hardship – is it fair for such (now) unfair contract to remain in force?

Criteria for the application of the hardship are:

The circumstances have substantially changed in comparison to the effective date of the agreement

For example: nowadays lessee is not using leased premises at all in order to comply with the Government’s Decree on Organization of work of Employers during the State of Emergency, due to which the lessee has organized the work from home and has left the leased premises.

The change in question puts one of the parties in difficulty or the purpose of the contract cannot be fulfilled

The purpose of every lease contract is to enable the lessee to use the leased real estate (here business premises), in consideration for the rent paid to the lessor. In a situation when a lessee is not using leased premises without the fault of any contracting party the purpose of a lease contract remains under the question mark.

It is obvious that the contract no longer corresponds to the expectations of the contracting parties

For a start: the lessee certainly did not expect that he/she will not be able to use the leased premises.

According to the general opinion, it would be unfair to maintain such an agreement in force in its present form

Almost every lease contract predicts the obligation of a lessee to pay the rent and other costs related to the usage of the leased premises. In most cases, it would be unfair to ask for the rent or at least for the full amount of rent, when there is no usage of the leased premises.

The party in difficulty was not obliged or able to avoid or prevent the hardship that occurred as a result of the change of circumstances – which has certainly been true in the times of the pandemic.

In order to determine whether the above described can apply to you, you should bear in mind:

Change of circumstances must occur before the contractual obligation of the party in difficulty is due. In other words, hardship could be invoked only in terms of the undue rents. For the rents that have become due prior to the occurrence of the new circumstances, the rule is clear: the lessee as a debtor must bear the legal consequences of such late payment.

For instance, if you have not paid the rent for February, and the pandemic has begun around middle March, it would be justified to ask the lessor to proportionally reduce the rent for March, but you were not in a position to request to be exempt from paying the rent for February, given that nothing has still changed in February, compared to the moment when you have signed the agreement in the first place;

The lease contract may be terminated by the court (if the parties cannot agree upon the termination of the contract). In that case, a particular court decision must be issued.

However, the court will not terminate the lease contract if the other party (for example, the lessor if the lessee seeks the termination through the court) offers or accepts the change of some conditions of the contract in a fair manner (for example, if the lessor offers/accepts the payment of a lower amount of rent, or delayed payment, or the complete relief from payment).

It is important to know that after pronouncing the termination, the court will, if the other party requests it, order the party claiming changed circumstances to compensate for an equitable portion of the damage that the other party suffers due to such termination of the contract. For example, if the lessee asks for the termination of the agreement, it should also be aware of the possibility of payment of compensation to the lessor, if the lessor files such a request.

Anyhow, if one party decides to ask for termination due to hardship, it should think about notifying the other party. If the lease contract is silent upon this question, and if the applicable law is Serbian, then the party claiming changed circumstances has a duty under the relevant law to notify the other contracting party about such circumstances, as well as of the intention to request the termination of the agreement due to the hardship. Otherwise, if you fail to inform your lessor of your intention to terminate the lease agreement, the lessor may require you to compensate the entire damages suffered due to the fact that you have not provided the respective notice on time. The same goes the other way, too.

Finally, one should look into the contract to check whether the parties agreed upon a prior waiver of the right to terminate the contract due to changed circumstances. This waiver is possible under Serbian law but must not be contrary to the principle of conscientiousness and honesty.

FREQUENTLY ASKED QUESTIONS

When it comes to safety measures, two situations are most common in practice:

Lessor has leased the entire building and has no contractual obligations regarding the safety measures and maintenance – in that case, the lessor most likely will not be held liable for performing the measures adopted by the Government.

Lessor has leased some of the premises within its own building, and the lessor is obliged under the contract to maintain some parts of the building (usually the common parts of the building such as the stairs, elevators, etc.) – lessor could be held liable for failing to undertake the safety measures. For example, safety measures in the event of COVID-19 could include more frequent cleaning than usual.

Lessees must obey the regulations issued by the Government and other competent authorities. That means that they should make sure all health and safety measures are in place.

Also, as employers they have some additional responsibilities:

assessing risks to employees and anyone who could be affected by their activities;

making sure that all the safety and preventive measures are taken;

keeping employees informed about all the measures that have been put in place, especially the ones related to preventing further spread of the COVID-19;

complying with the relevant provisions of the law.

Some countries have, as soon as the state emergency has begun, adopted the decision to delay the payment of the rent for the next three months if requirements are fulfilled. This privilege was only granted to those that have been up to date with the payments. Furthermore, some countries have banned landlords from starting eviction proceedings during a state of emergency. [1]

A lessee who leases the workplace may want to make certain changes to create the workspace less dense in order to keep the distance between the employees. It is also in the lessors’ best interest to allow these changes in order to comply with the safety measures the Government has prescribed and minimize the impact of the outbreak. However, a lessee should be very careful when it comes to the change of the leased premises. Usually, the contract regulates the issue of what changes are allowed to the lessee for space adaptation. If the contract is silent on this matter or in case of doubt, the safest option would be to agree with the lessor in writing upon this.

Although during the COVID-19 pandemic Serbian competent authorities have not adopted any specific legal regulations regarding the lease and the change of the agreement due to the state of emergency, from the present point of view it appears that the lessors and lessees have mostly managed to agree on the mutual rights and obligations, in accordance with the previously described general rules. It is true that the majority of the dilemmas with regard to the obligations arising out of lease would likely be avoided or at least decreased if this matter has been precisely regulated at the adequate moment, it is relieving up to a certain point to know that there are, after all, certain legal regulations explaining how to react in this kind of situations – although we hope they will not be repeated in the near future.