On 11 March 2020, the World Health Organization declared the Coronavirus Disease 2019 (COVID-19) outbreak a pandemic. One of the key measures employed to prevent the rapid spread of the virus is the imposition of certain legal restrictions on conducting certain types of businesses. Hence many questions arise: what happens to lease agreements, what are the rights of the parties thereto in this new situation, can the landlord or the tenant terminate such lease?
The considerations below apply exclusively to lease agreements which do not otherwise regulate force majeure events or the tenant’s inability to continue business operations in the leased premises.
Is an epidemic or pandemic a force majeure event?
Although the Civil Code does not contain any definition of force majeure, legal commentators and case law have built a body of material, based on which we can define force majeure as an external, unpredictable event with unavoidable consequences. It is an occurrence with an overwhelming impact, the consequences of which cannot be fought off. Traditionally, force majeure events include natural disasters and other occurrences caused by natural forces (vis naturalis), but also acts of authorities, such as acts of law or administrative decisions (vis imperii), which result in a party’s inability to perform an obligation. A failure to perform an agreement due to a force majeure event results in no liability of the debtor for the creditor’s loss arising from such nonperformance.
An epidemic or pandemic may generally constitute a force majeure event connected with natural forces. However, to rely on it as an event that excludes liability will not always be legitimate. It all depends on the circumstances of a given event and the type of obligation. Thus, for instance, despite limited access to products and services due to the ongoing epidemic, a landlord may still manage to provide uninterrupted cleaning service of common areas of a shopping center. On the other hand, the prohibition from carrying on certain types of business or an order to close the shopping center, may in each case qualify as a force majeure event. They may be considered acts of authority, which must not be disobeyed by the landlord or the tenant.
Limitations on the Operation of Institutions and Workplaces
Pursuant to 13 March 2020 Regulation declaring the territory of Poland an epidemic threat, the Minister of Health introduced many orders, prohibitions, and restrictions on business activities. As provided by the Regulation, starting from 14 March 2020 until revoked, in retail facilities with a sales areas exceeding 2,000 sqm the following temporary restrictions have been established: 1) a temporary restriction on retail sales imposed on tenants of retail premises whose core business involves the sale of textiles, clothes, shoes and leatherware, furniture and lighting equipment, consumer electronics, domestic appliances, stationery items and books, as well as 2) a temporary restriction of conducting restaurant and entertainment businesses. The said temporary restrictions equal a total ban on conducting by tenants of the above types of business activities.
Can a retail tenant restricted from conducting business claim rent reduction?
The restriction referred to above is for tenants and not the owners of shopping centers. The landlord lets the shopping center to tenants, and thereby performs its obligation to ensure that the tenant has access to the leased premises.
In such circumstances, is the tenant required to pay rent and service charges? Can the tenant claim a force majeure event and refuse to make payments under the lease agreement? As it appears, in principle, the tenant may be obliged to make these payments to the landlord, as the force majeure event, i.e., the declaration of an epidemic threat and the related prohibition on business activities, may not prevent the tenant from satisfying its reciprocal obligation consisting in the payment of rent. Although the tenant does not operate in the leased premises, a force majeure event lying on the tenant’s side (prohibition to conduct business activity) has no impact on the tenant’s ability to perform its obligation to pay the rent and therefore, may not be raised as circumstance releasing the tenant from this obligation.
The tenant, on the other hand, may plead that an extraordinary change in the relationship has occurred (Article 357(1) of the Civil Code). The tenant would have to initiate a court proceeding to that purpose, because the nonpayment or reduction of rent and service charges for a stoppage period does not occur automatically. The tenant would have to prove in court that paying the rent would entail excessive difficulties or expose it to major losses, which the parties did not predict at the time when they executed the lease. The court will consider either party’s interests and may, following the principles of community coexistence, determine the manner of the obligation performance or the amount of the obligation. It may be expected, considering the exceptional and unprecedented situation, as well as the principles of community coexistence (just and equitable distribution of the burdens caused by the disease outbreak) that the courts will grant the tenants’ claims. This may apply in particular to those tenants who will become insolvent as a result of the downturn caused by the outbreak.
Can the tenant terminate the lease?
The law does not give a tenant the right to terminate the lease agreement due to tenant’s inability to conduct business in the leased premises because of a governmental ban addressed to the tenant. No such right can be derived from legal commentaries or case law. The tenant may not have the right to terminate the lease in such circumstances, unless such right has been stipulated in the lease agreement. Of course, the tenant may apply the clause of an extraordinary change in the relationship discussed above. If all the conditions described above are fulfilled (the tenant proves that continuing the lease would entail excessive difficulties or expose it to major losses), the court may decide on the termination of the lease agreement. Such a termination would go into effect for the future, i.e., starting from the date when the court judgement becomes final and nonappealable. However, having considered all the facts of the case and interests of the parties, the court may specify in its judgement a different date as the lease termination date. Such a date can be earlier or later than the judgement date. In principle, such court termination of a lease should only be applied in exceptional situations, where modifying the contract to match the changed conditions is impossible.
Closure of Shopping Centers
It is possible that the Minister of Health, exercising his rights vested in the Act of 5 December 2008 on the Prevention and Combating of Infections and Infectious Diseases in Humans, may issue an order addressed to shopping center owners ordering a temporary shutdown of all shopping centers. Such a situation constitutes an event of force majeure which prevents the landlord from providing contractual benefits to the tenant, because the landlord is no longer able to ensure quiet enjoyment and use of the lease object.
In such instances the courts may attempt to apply the regulations concerning statutory liability for legal defects in an object of lease, although it will depend on whether the view will prevail that this liability is absolute (i.e., the landlord is liable even in the event of force majeure). Article 556(3) of the Civil Code applied by analogy to the lease relationship would therefore impose liability on the shopping center owner for the legal defects defined as the restrictions on the use of the leased premises caused by a decision or judgement of a competent authority. However, such an approach is uncertain, because the restrictions on the use of the premises should arise from an individually addressed deed (administrative decision, court judgement), rather than a provision of law, such as the aforementioned ordinance of the Minister of Health of 13 March 2020. If such an expansive interpretation were adopted, then according to Article 664 § 1 of the Civil Code the tenant would be able to demand a reduction in the rent (and probably the service charges) for the time of such a stoppage.
Another question that arises is whether the tenant could exercise the right to terminate the lease referred to in Article 664 § 2 of the Civil Code. The Code states that the tenant may terminate the lease without notice periods, if any defects preventing the use of premises in accordance with the lease agreement occurred after the handover of the leased object to tenant and they cannot be remedied. The COVID-19 outbreak may not give the tenant such right, because Article 664 § 2 of the Civil Code concerns a permanent and nonremediable inability to use the lease object. An epidemic threat and epidemic outbreak may last a long time, but at some point they end and the ability to use the leased premises may be restored for the tenant.
This GT Alert is limited to non-U.S. matters and law.
For more information and updates on the developing situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019.