In the tough times of battling the coronavirus, many tenants are seeking ways to reduce their rent, release themselves from the obligation to pay rent, or avoid other obligations under their existing leases. What opportunities does the law offer them?
In connection with the coronavirus pandemic, from 14 March 2020 until further notice a total ban was introduced in Poland on retail sales in commercial facilities with a sales area above 2,000 m2 by tenants of commercial space whose main activity involves trading in such items as textiles, clothing, shoes, and leather goods. The basis for the ban is the Regulation of the Minister of Health of 13 March 2020 Declaring a State of Epidemiological Threat in the Republic of Poland.
For many tenants at shopping centres, this is resulting in a total loss of sales revenue. But many of them have signed leases not only authorising them to conduct certain commercial activity in their leased premises, but even obliging them to open their shops during certain hours. Many leases provide that in the event of closing of shops, the landlord has a right to charge the tenants contractual penalties. Will tenants’ compliance with the retail ban expose them to contractual penalties?
Legal institutions such as the Civil Code clause on extraordinary change in circumstances (rebus sic stantibus) and the notion of force majeure (“superior force” or “higher power”—a notion not defined in the Civil Code) may come to the tenants’ rescue. Application of these institutions requires an analysis of the terms of the lease in each case, but we can nonetheless offer a few general remarks.
Numerous rulings, including by Polish courts, have held that the force of nature in the form of an epidemic constitutes a state of force majeure. Leaving aside the epidemic itself, even an act of public authority (such as a regulation) may be regarded as a state of force majeure. For example, a ban on imports or exports, a state of emergency, a non-functioning judicial system, a blockade of borders and the inability to return to the country, as a result of acts of public authority, have been recognised in court decisions as constituting a state of force majeure.
As the Supreme Court of Poland stated in its order of 16 September 2011 (case no. IV CSK 77/11): “An event that is external, unforeseeable and unpreventable is regarded as force majeure. There is no doubt that the action of state authority may also constitute force majeure.”
As a rule, if the obligor cannot perform its obligation due to force majeure, the obligor may avoid liability to the obligee. This follows from the general principle of contractual liability based on a standard of due diligence (Civil Code Art. 355 and 471). But classifying the current state of affairs as a state of force majeure does not automatically lead to the conclusion that every obligor is released from its contractual obligations. The obligor must prove that its failure to comply with the contract was caused by:
- External circumstances
- Unforeseeable within the given relationship
- Which the obligor could not prevent even applying the greatest degree of diligence.
Duty to open shops
Thus it might seem at first glance that most tenants, unable to comply with the duty to open their shops due to the ban introduced by the regulation, may be released from liability to the tenant for payment of contractual penalties. After all, the tenants have no influence over the wording of the regulation, so even applying the greatest diligence they could not prevent closing of their shops. But in every individual case it is necessary to examine the principle of liability which the tenant’s obligation to pay a contractual penalty is based on.
Duty to pay rent
It should be pointed out that the regulation of the Minister of Health does not directly impact the obligation borne by tenants to pay rent under their leases. After all, there is no act of public authority expressly preventing tenants from continuing to pay rent. Thus entry into force of the regulation does not mean that tenants are automatically released from the obligation to pay rent. The impact of the epidemic and the regulation as a state of force majeure on the obligation to pay rent must be examined on a case-by-case basis.
It cannot be ruled out that in an exceptional situation, the tenant could prove a lack of fault, for example if due to the absence of staff caused by a sudden quarantine it could not make a payment on time, or due to a lack of revenue it did not have funds and could not raise them through credit. But it should be borne in mind that delay in paying rent will give rise to an obligation to pay interest on delay. One generally cannot be released from this obligation by showing a lack of fault or even the existence of a state of force majeure. Moreover, the failure to pay rent may provoke the landlord to exercise various forms of security, such as bank guarantees or submission to execution, and also lead the landlord to terminate the lease. It is thus essential to examine the specific lease contract, including the rules for the tenant’s liability, as well as the security instruments or other mechanisms available to the landlord.
Clauses are sometimes found in lease contracts releasing the tenant from the duty to pay rent for example if there is an occurrence of force majeure making it impossible to use the leased premises due to a threat to the life of the tenant’s employees. Provisions are also encountered expressly requiring the tenant to pay rent for the first few months after occurrence of an event of force majeure. Much will depend on how force majeure is defined in the specific lease contract. The contract might also require the tenant to notify the landlord in writing of the occurrence of force majeure within a certain time as a condition for asserting claims on this basis.
The date when the lease or annex is signed should also be considered, because tenants who have entered into or amended a lease contract when the existence of force majeure was already known might waive the argument that the epidemic was unforeseeable. Thus tenants may fall into a trap by signing annexes without careful consideration, thus losing the defence of force majeure.
Extraordinary change in circumstances
Although the occurrence of force majeure can sometimes justify releasing the tenant from liability for failing to perform a given obligation under the lease in the specific circumstances, it does not entitle the tenant to make a unilateral and permanent change to the provisions of the lease (such as a rent reduction) or to terminate the contract.
In many instances, the proper action by the tenant would be to exercise the institution of rebus sic stantibus (extraordinary change in circumstances) provided for in Art. 3571 of the Civil Code. It allows a permanent change to be made to the contract, or even dissolution of the contract. That article provides: “If due to an extraordinary change in circumstances performance would entail excess difficulties or threaten one of the parties to a glaring loss which the parties did not foresee when concluding the contract, the court may, after weighing the interests of the parties, in accordance with principles of social coexistence, designate the method for performance of an obligation or the amount of consideration, or even order the dissolution of the contract. In dissolving the contract, the court may as needed rule on the settlements of the parties, guided by the same principles.”
But this is a subject for a separate article (as discussed for example in “Businesses’ contractual obligations in a time of pandemic”). It is also essential to respond quickly to protect tenants’ interests against a unique and evolving situation on the market for lease of commercial space caused by the pandemic and legal acts adopted to combat it.
Maciej Machlejd, attorney-at-law, Real Estate practice, Wardyński & Partners