COVID-19 and Lease Agreements: may Tenants rely on Force Majeure?

The impact of corona pandemic on contractual obligations under Qatari Law

As the world faces up to the challenges posed by the spread of COVID-19, clients have started asking what effect it could have on commercial agreements.

In particular, this note considers the commercial lease agreements constructed in accordance with and subject to Qatari Law. Does the current pandemic constitute a qualifying event for the enforcement of a force majeure clause? Is the Landlord under obligation to grant a rent free period or rent support to Tenants?

This legal advice has been drafted at the request of the owner of a shopping mall in Qatar (hereinafter the “Landlord”) and assess the impact of COVID-19 pandemic on contractual obligations under Qatari Law.

LEGAL FRAMEWORK

Law no.24 of 2004 regarding Promulgation of the Civil Code does not provide a definition of Force Majeure; however, from the jointly interpretation of Articles 188, 204 and 256 of the Civil Code, the concept of force majeure arises as any unpredictable and unforeseeable event beyond the control of the obliged party which renders the performance of such party’s obligation impossible: in this case the affected party may be entitled to relief, including a (i) suspension of contractual obligations; (ii) exclusion from certain liabilities for non-performance or delay; and even (iii) termination of the contract (in limited situations)  without the affected party being liable for damages.

Specifically, a party relying on a force majeure clause would usually have to prove the following  four major requirements:

A.      The event falls within the definition of Force Majeure Event depending on the specific wording in a force majeure clause in the Agreement (see paragraph A);

B.      The event is unforeseen and beyond the control of the affected party and there were no reasonable steps that the tenant could have taken to avoid or mitigate the event or its effects (see paragraph B);

C.      The affected party was prevented from or delayed in performing its obligations under the contract as a result of the event (see paragraph C)

D.   Tenant has complied with the procedure contractually set out in the Agreement as to how the clause may be invoked (e.g.  14 days written notice to be provided by the affected party to the other). This must be properly followed as failure to do so can impact subsequent legal claims.

Specifically, the effect of exercising a force majeure clause in the context of Lease Agreements may include a suspension of rent or part thereof, or the right to terminate the Lease Agreement under the specified terms and conditions.

A. LEASE AGREEMENTS – FORCE MAJEURE CLAUSE

Landlord Lease Agreement can be classified as follows:

• Lease Agreement – Store (hereinafter “Store Lease Agreement”)

The Store Lease Agreement includes Force Majeure under clause 25 of the Agreement:

 “Neither party shall have any liability or be deemed to be in breach of this Lease by reason of any delay in performing or failure to perform any of its obligations under this Lease if the delay or failure was beyond that party’s reasonable control (including, without limitation …. epidemic..) (“Force Majeure Event”). If a party is subject to a Force Majeure Event it shall notify the other party within fourteen (14) days from the occurance of the Force Majeure Event. If the Force Majeure Event prevails for a continuous period of more than six (6) months, either party may terminate this Lease by giving fourteen (14) days written notice to the other party. On the expiry of this notice period, this Lease will terminate. Such termination shall be without prejudice to the rights of the parties in respect of any breach of this Lease occurring prior to such termination.”

As mentioned, there is no legal definition of “force majeure” and it is for the parties to agree on the scope and definition of events that would constitute force majeure under the relevant contract. As such, provided that Store Lease Agreement includes a Force Majeure Clause and that epidemic is expressly included in the list defining a Force Majeure Event, there is no doubt that COVID19 shall be deemed a Force Majeure Event.

• Lease Agreement - Kiosk (hereinafter “Kiosk Lease Agreement)

The Kiosk Lease Agreement does not include a Force Majeure Clause.

We shall therefore refer to the abovementioned provisions of the Qatari Law.  As seen, there is no specific definition in the Qatari Civil Code for force majeure; neither it is possible to refer to an extended case-law in order to retrace a presumable output from the Qatari Courts other than the general condition of Force Majeure referred to in the legal framework above.. Such incertenity will reasonably lead to a dispute between the parties over the classification of pandemic as a Force Majeure Event or not.

Provided that final decision lies in the court’s discretion, please note that the absence of a Force Majeure Clause works in Landlord favor as the burden of proof lies with the Tenant and may therefore discourage any action.

B.           UNFORESEEABLE AND INEVITABLE EVENT

Being declared “global pandemic” by WHO, COVID-19 is deemed to be an unpredictable and unforeseeable event beyond the control of the parties.

C.           MATERIAL EFFECT

Force majeure clauses also require the party seeking relief to prove that it was prevented from or delayed in performing its obligations under the contract as a result of the event. This means that force majeure may not be invoked simply because that event exists; to the contrary, such event shall have materially affected the ability of the party to fulfill its contractual obligations [Please note that on the basis of this requirement, payment obligations are typically excluded from force majeure scope due to their “fungibility” and “ substitutability”].

In this regard, it is necessary to define two different scenarios:

Scenario 1: The government/local council closes Mall and /or the single retail stores because of COVID-19.

If Mall and /or the single retail stores had to close pursuant to a decision of the Ministry of Public Health (MoPH) or any governmental body, Tenants would be materially prevented from accessing and operate the leased premises and even would be liable in law if they failed to abide by such decision. Accordingly, it is clear that in such case COVID-19 (or better the enforced closure of the Mall and/or retail activities arising from the outbreak) may be invoked by tenant as a Force Majeure Event. [As an example, please note that retailers and investors operating in Katara and Musherib – closed upon Government decision- have been exempted from paying rental fees and service charges for the period of suspension].

Scenario 2: The government/local council does not impose closure of Mall and /or the single retail stores; however; Tenants claim that due to the reduced inflow of visitors and consequential loss of profit, payment of the rent shall be suspended or reduced.

In this scenario, where Tenants are still able to access and operate the leased premises, although it is likely for Tenants to claim occurrence of Force Majeure, it is not straightforward to argue that COVID-19 outbreak has materially affected the ability of the Tenants to fulfill their contractual obligations: indeed among others, Tenants are under obligation to keep the Premises open for business continuously during the operating hours and to timely pay the due rent. It is clear that a reduced inflow of visitors does not directly prevent them from doing so. Accordingly, Tenant cannot relay on the Force Majeure clause.

However, Tenants might refer to and invoke the theory of “economic hardship”.

Article 171(2) of the Qatari Civil Code states that where “exceptional and unforeseeable events” mean that the “ of the contractual obligation, though not impossible, becomes excessively onerous in such a way as to threaten the obligor with exorbitant loss”, the Qatari courts are entitled to “reduce the excessive obligation to a reasonable level”, though this is dependent upon the circumstances and is permissible only “after taking into consideration the interests of both parties”.

The theory of “economic hardship” is based on the following requirements:

a.             In order for Article 171(2) of the Qatari Civil Code to be engaged, what is required is an “exceptional and unforeseeable event”; as mentioned above COVID-19 shall be deemed an exceptional and unforeseeable event.

b.            Such event shall fundamentally alter the equilibrium of the contract resulting in an excessive burden being placed on one of the parties involved; as opposed to the Force Majeure, the performance of the obligation has not become impossible but rather excessively burdensome. In this regard, we can reasonably assume that the significant reduction in visitors’ flow due to COVID-19 will result in a diminished value of the Leased Premises against which the current rent fees stipulated in the Lease Agreement would result excessively burdensome.

c.             The remedy does not take automatic effect but lies in the court’s discretion; in evaluating the hardship and reducing the excessive obligation (without withdrawing the obligation it self) the court shall apply the criteria of “equity”. This final requirement is absolutely crucial and works in Landlord’s favor: indeed the Tenant cannot deliberately and unilaterally suspend or pay a reduced rent fee (pacta servanda sunt still operate as the golden rule); such circumstance would constitute a material breach of the Lease Agreement regard to which Landlord shall be entitled to exercise any right and remedy under the agreement and the applicable law. In other words a rent reduction may be executed only pursuant to:

• Court’s decision based on equity;
• Renegotiation of the contractual terms resulting in a mutual amendment of Lease Agreement made in writing and signed by the Landlord and the Tenant.

However, it is understood that in case the Landlord receives any monetary support and injection from the Government, such incentives shall be equally allocated  and distributed among Tenants on a back-to back basis.

CONCLUSION AND LEGAL ADVICE

In light of the above, we advice as follows:

• there is prima facie no duty on the Landlord to offer any concessions, such as rental rebates or waivers in the event of a pandemic outbreak, and the tenants continue to be bound by its obligations to promptly pay rent under the tenancy agreement;
• where a government decision enforces the closure of the Mall and/or single retail stores, Tenants have the right to invoke Force Majeure (proving that COVID-19 constitutes a Force Majeure Event – specifically for Kiosk Lease Agreement- and that such event has materially prevented performance of its obligation) and seek suspension of payment and/or termination of the Lease; Tenants shall loose such right if the contractual procedure and time limits are not complied with;
• where the Mall and/or single retail stores are still operative, Tenant may request (but not unilaterally apply) a renegotiation of the contractual terms and rent reduction under Article 171(2) of the Qatari Civil Code provided that the equilibrium of the contract has been frustrated.

Francesca Ingletto

Legal Consultant