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

03
Apr 2020

Contact: Nina Radin

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 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 as 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 the COVID-19 does not necessarily mean that one could invoke force majeure. It will depend on the situation. On top of that, 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 lessee or lessor to perform their contractual obligations.

For example, the obligation of lessor could be to handover 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 handover the leased space and thus fulfills his contractual obligation. However, these situations are not so common.

On the other hand, lessees are usually faced with the fact that they are respecting the above-mentioned Government’s Decree by organizing work from home for their employees. Because of such work organization leased workplace is empty. However, the lessors are still asking lessees to pay the rent. The problem with the legal institute force majeure in described situation lays in the fact that in most cases, buildings are not closed by the mandatory decision of the respective authorities. In other words, the lessee is not absolutely disabled to use the leased workplace, and thus the force majeure would be hard to prove. The situation is different when it comes to shopping malls, because the state prohibited their work. In cases when governmental decision directly causes the inability of one party to perform its contractual obligation, that party could invoke force majeure. It will depend on the situation.

HARDSHIP

(Change of Circumstances)

This legal institute is applicable when the performance of the contractual obligation is very hard, very difficult – but not entirely impossible (when 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 that struggle in performance opens a key question when it comes to a hardship – is it fair to leave such (now) unfair contract unchanged?

Criteria for the application of the legal institute of 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 due to the COVID-19 and the Government’s Decree on Organization of work of Employers during the State of Emergency, because 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 subject matter (here premises) and that lessor collect the rent for such usage. In a situation when a lessee is not using leased premises without the fault of any contracting party the purpose of a lease contract is under the question mark.
  •   It is obvious that the contract no longer corresponds to the expectations of the contracting parties – for a start: lessee certainly did not expect that he will not be able to use the leased premises.
  •   According to the general opinion, it would be unfair to maintain it in force in its present form – present form in 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 was not able to take into account the change of circumstances on the effective date or the party could not have avoided or overcome the difficulties.

When considering this legal institute, one 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 regarding undue rents. For the rents that are due, the rule is clear: lessee as a debtor must bear the legal consequences of such late payment.
  •   Lease contract may be terminated by the court (if the parties cannot agree upon the termination of the contract), which means that a court decision is required here.
  •   However, the court will not terminate the lease contract if the other party (for example, the lessor if the lessee seek 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 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 this kind of termination, the lessee must take into account the possibility of payment of compensation to the lessor.
  •   Anyhow, if one party decides to ask for the termination due to the 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 and about the intention to invoke the legal institute hardship. Please note that duty to inform is very important in these circumstances and failing to inform the other party may lead to an obligation to compensate for damages.
  •   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 the 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 from the building, which building is generally under his control, 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 non-performance of 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 already adopted the decision to delay the payment of the rent for the next three months if requirements are fulfilled. This privilege is only available to those that have been up to date with the payments. Some of them banned the landlords from starting the eviction proceedings during the state of emergency.[1]

We would strongly suggest that the Government considers this legal issue among the measures that are supposed to mitigate the health and economic consequences of the pandemic.

A lessee who leases the workplace may want to make certain changes to create the workspace less dense in order to keep distance between the employees. It is also in 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 upon this.

 

[1] These measures have been taken by some cities in the USA (San Jose, San Francisco, Miami-Dade County in Florida and Baltimore). A similar initiative was given by the EAPN (The European Anti-Poverty Network) – they suggested prohibition of the further progression of the eviction proceedings in the countries of the EU. The German Federal Government is currently working on a Law for the Mitigation of the consequences of the COVID-19 pandemic.

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