Tenant’s right to unilaterally extend lease agreement during the coronavirus epidemic | In Principle

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Tenant’s right to unilaterally extend lease agreement during the coronavirus epidemic

Entry into force of the Anti-Crisis Shield, i.e. the 31 March 2020 amendments to the Anti-Crisis Act, has had a strong impact on the real estate market, especially the rental market for space at shopping centres. In addition to the widely discussed Art. 15ze, which has extinguished mutual obligations of the parties to lease agreements, the parliament has also introduced another important provision which may significantly affect the rights and obligations of not only the parties to lease agreements, but also other participants in commerce.

This is Art. 31s introduced to the Anti-Crisis Act of 2 March 2020, which has granted tenants, under certain conditions, the right to unilaterally extend lease agreements whose term would expire after 31 March 2020 but before 30 June 2020.

Unclear purpose

The reasons for introducing this provision are not entirely clear. Most likely the parliament wanted to meet the expectations of tenants who, due to the expiry of the lease period, would have to take action to find and move to new premises during the epidemic, when social distancing is in force. But it is not clear why, in this situation, the right to an extension is only the tenant’s unilateral right, when the risk of contagion also equally affects the landlord’s people.

Doubts about the parliament’s assumptions are all the greater as, in business transactions, especially at large office and retail properties, lease agreements are usually negotiated and concluded by the parties many months before the lease period begins. Therefore, it does not seem that the parliament’s intervention in such rental relations was necessary or intended. However, the current wording of Art. 31s may cause many problems and uncertainties regarding the legal situation not only of landlords, but also of other tenants and their customers and suppliers.

Scope of application

This provision covers lease agreements which were in force before entry into force of the amendment (i.e. before 31 March 2020) and would expire before 30 June 2020. This date is fixed and is not linked, for example, to the duration of any ban on business operations.

Unless otherwise provided, this provision should apply to contracts for the lease of residential and commercial premises, whether wholly or partly leased. Thus it will apply to lease agreements for space in shopping centres, which are subject to the Civil Code provisions on the lease of premises (Art. 680 and following) (e.g. Supreme Court judgment of 19 October 2006, case no. V CSK 230/06), and therefore also lease agreements in which the parties’ mutual obligations have been extinguished for the duration of the epidemic.

Art. 31s of the Anti-Crisis Act does not modify the general principles of making declarations of will, so in the absence of relevant contractual provisions in this respect, the tenant’s declaration should be considered to be made if it reaches the landlord in a manner enabling the landlord to learn of its content (Civil Code Art. 61), and the tenant’s declaration should be made in the form required by the parties or the Civil Code applicable to amendment of the agreement (Civil Code Art. 77).

The tenant may submit a declaration exercising the right of extension even on the last day of the lease term. The agreement is then automatically extended through 30 June 2020 under the existing conditions.

Exclusions of application

However, the right of extension is not absolute. Under Art. 31s(3) of the Anti-Crisis Act, the right of extension will not be available to tenants of commercial premises who:

  • Within 6 months before 31 March 2020 were in default of payment of rent or other charges for the use of premises, including charges independent of the landlord (e.g. for utilities delivered to premises) for at least one settlement period, in an amount equal to at least one month’s rent
  • During the term of the lease used the premises in a manner contrary to the agreement or the intended purpose of the premises, or neglected their duties, allowing damage to the premises
  • During the term of the lease, let, sublet or gave away the premises or part thereof for free use without the landlord’s required written consent.

Moreover, in the case of residential units, extension is not available to tenants who hold legal title to another unit in the same or nearby locality, meeting the conditions for a replacement unit, unless the tenant cannot use that unit for reasons beyond the tenant’s control.

Uncertainty of landlords’ situation

It is easy to imagine a situation where an existing lease expires on 30 April 2020 and the landlord has concluded a new lease in advance, under which the premises are to be handed over to a new tenant on 1 May 2020. In such a situation, the landlord must take into account the risk that the existing tenant will exercise the statutory right and extend the lease until 30 June 2020, making it impossible for the landlord to fulfil its obligations under the new lease.

If the lease relates to commercial space in a commercial facility with a sales area of more than 2,000 m2, where activity has been restricted by the regulation introducing the state of epidemic (or subsequent amending regulations of the Council of Ministers), a situation may occur in which the tenant will be entitled to extend the lease under Art. 31s of the Anti-Crisis Act, and then extend the lease under Art. 15ze of the act, i.e. for the period of the ban on conducting business activity plus an additional 6 months (if the ban on conducting business operations is lifted before 30 June 2020).

As a result, the landlord would not be able to fulfil the obligation to hand over the premises to the new tenant for many months, risking the new tenant’s withdrawal from the agreement. On the other hand, the new tenant would have to postpone the commencement of operations or fit-out work in the new premises. In turn, this means potential losses for the tenant’s construction contractor or even its suppliers.

In conclusion, it seems that the provision in question only reinforces the state of uncertainty among participants in trade, and could cause problems instead of preventing them. The parties to a lease agreement subject to this regulation should undertake discussions as soon as possible regarding the tenant’s potential intention to extend the lease and the landlord’s ability to continue leasing the premises, in order to find a compromise solution.

Dr Jakub Baranowski, attorney-at-law, Real Estate practice, Wardyński & Partners