COVID-19: What are the issues that commercial real estate landlords and tenants in Europe need to know?
In this series of articles, Meritas member law firms in Europe (www.meritas.org) are addressing some of the key measures taken across Europe to assist companies in conducting their business, maintaining liquidity and easing the economic impact resulting from the spread of the Coronavirus.
Over the last couple of weeks, we have explored topics such as: the measures taken to prevent the control of the virus and how this relates to businesses; implications for company’s private contractual obligations; financial support measures, the effect on judicial proceedings and implications for commercial real estate. See below for the links to these articles.
In our last article, we looked at restrictions placed on retailers and businesses operating in the commercial real estate sector.
In this next article, we are looking at the issues that commercial real estate landlords and their tenants need to be aware of in different countries across Europe.
Summary
The closure or restrictions on businesses and the severe drop in custom and revenue caused by the measures to combat the spread of the Coronavirus has had a significant impact on commercial real estate landlords/lessors and their tenants/lessees, with the major issue being the non-payment of rent.
Lessors are now fearing that payment defaults and potential insolvency of their lessees will impact their own financial position, while lessees are looking at ways to reduce their costs by reducing or delaying paying their rents or even getting out of the lease agreement.
When it comes to resolving the challenges there are a number of issues that landlords and tenants need to consider in deciding the best course of action.
1. Commercial Lease Agreements essentially place an obligation on lessors to make the leasehold available to the lessee and on lessees to keep the business open and pay an agreed rent.
2. Lessees cannot unilaterally decide to reduce or not to pay their rent and doing so may result in penalties and action taken by the other party.
3. Lessees may look to the following clauses and doctrines to void or change the terms of the agreements
a. Force Majeure, which alters the parties’ obligations under a contract when an extraordinary event beyond the parties control prevents the parties from performing the contract or
b. The doctrine of Frustration – in which an unforeseen event outside the control of the parties has made the contract impossible to perform, or has transformed performance of the obligations under the contract into something so radically different from that which the parties intended that it would be unfair to hold the parties to their obligations.
The extent to whether these can, or will, apply will vary in different countries and the respective views of their courts.
4. A number of Governments have introduced COVID-19 legislation and measures to support tenants such a moratorium on forfeiture of the lease by the lessor due to non-payment of rent for period of time, and preventing applications for insolvency during the crisis.
5. Some Governments have also provided financial assistance for lessees specifically to help them pay their rents and utility bills during his crisis, which should be taken into account when agreeing to reductions on rents.
The main advice being provided across Europe is for both lessors and lessees to take a commercial approach to resolving this issue; to discuss early the challenges they are facing and look to come to a mutually beneficial agreement.
Lessees should not take unilateral action with respect to non-payment or reduction of rent. While lessors on the other hand may be better served to come to an agreement to reduce or delay the rental payments as opposed to evicting and thus needing to seek other lessees, which in the current climate may be difficult.
While the legal principals concerning commercial lease agreements are similar across Europe, there are notable variations in how COVID-19 is impacting these agreements in different countries and the measures in place to support both landlords and tenants.
In Belgium, concern is rising within the commercial real estate sector regarding the payment of rent. Landlords are concerned that defaults on rental payment may impact their own finances, while tenants may be tempted to withhold payment of rent to allocate cash towards expenses deemed more urgent.
The following legal grounds can be called upon by the tenant / lessee:
- Force Majeure / Fait du Prince: the current situation can possibly be considered as an “act of Government” (‘Fait du Prince’) – meaning any impediment resulting from an order or prohibition emanating from a public authority. Such an order must however (i) have been unforeseeable at the time of conclusion of the contract, (ii) be unavoidable from the debtor's point of view and (iii) not be attributable to the debtor or to a person for whom he is responsible.
- Article 1722 of the Belgian Civil Code could provide a legal ground for suspension and/or termination of the agreement if the crisis results in so-called “partial or total loss of the leased premises”. This may also include “legal loss” - i.e. the impossibility to provide or enjoy the premises according to the terms and conditions agreed.
- Abuse of law / acting in good faith: Either party acting unilaterally could be considered an abuse of law. However, whether parties can call upon abuse of law is highly uncertain and will depend on the specific circumstances of the case.
Please note that since no case law is available at the moment, it remains to be seen how these legal grounds will be interpreted by the courts. The outcome remains uncertain.
In Denmark, social distancing is placing significant restrictions on businesses and resulting in many legal challenges. These primarily concern the obligation on the lessor to make a leasehold available to tenants /lessees and on lessees to keep the business open and pay rent.
- In Denmark, the key to such disputes/challenges will often follow from the lease agreement itself as the principle of ‘freedom of contract’ applies to such agreements. If no agreement is reached, the Danish Act on Commercial Rent will apply.
- On the issue of Force Majeure, it is likely that a complete industry ban may lead to a force majeure conclusion, but in order to state "no-liability" it will be important for the lessee to immediately inform the lessor.
- It is important to note that the ban will likely not lead to the lessor not having made the premises available to the lessee in which case Force Majeure may not apply. Each situation will be needed to be assessed separately.
- According to the Commercial Rent Act the lessee is always entitled to ordinary termination according to the notice agreed between the parties in the lease agreement
Key to resolving these issues is that neither lessor nor lessee should take a very aggressive standpoint prior to a thorough assessment of the particular situation at hand.
In England, the biggest area of discussion and dispute is for non-payment of rent. There are a number of remedies available to landlords for non-payment of rent by tenants. These are largely as follows:
1.Forfeiture - If rent is unpaid, subject to the terms of the lease a landlord may be entitled to forfeit the lease.
The UK Government has, however, recently legislated to introduce a moratorium on forfeiture until 30 June 2020. This will prevent landlords from relying on a forfeiture clause where a tenant has not paid the rent. It should be noted that this is not a reduction or cancellation of the requirement to pay the rent and the landlord will be entitled to enforce its remedies following 30 June.
2. Statutory demand - Immediately following non-payment of rent, a landlord can serve a statutory demand requiring payment of the arrears. A tenant will then have 21 days to make the payment failing which the landlord can petition for the winding up of the company.
The Courts in England and Wales have announced that winding up matters cannot be conducted remotely and given the restrictions placed on the courts, all winding up petitions will be adjourned to hearing dates in June 2020 onwards. However, this will not prevent landlords from petitioning to the court and advertising in the London Gazette if the debt is not paid within 21 days of the statutory demand. This is thus is the best way to put pressure on tenants to pay any rent arrears.
3. CRAR (commercial rent arrears recovery) - Without a court order a landlord can instruct a bailiff to attend the premises and seize goods up to the value of the arrears and sell all the goods at auction. However, with most retail premises closed this is unlikely to be a remedy that landlord's seek to exercise. Further, there is likely to be a low demand for any onward sale of goods.
In relation to termination of leases, there are potentially two courses of action that a tenant can take:
- Rely on the doctrine of frustration - but there is no case authority on this point in relation to COVID-19 at present and as the Courts in England and Wales take a very restrictive approach in frustration claims, this argument is unlikely to succeed.
- Rely on Force majeure clauses – however, there is no common law principle of force majeure and so it will only apply if the lease contains a force majeure clause, which is uncommon. If it does the specific wording of the clause needs to be examined to ensure that COVID-19 would constitute a force majeure event. Again, the Courts in England and Wales have adopted a narrow approach to force majeure events and if there is a lesser remedy that is appropriate, the Courts are more likely to adopt this.
In Estonia
- Change of the lease agreements - According to law the injured party may demand amendment of the lease agreement from the other party due to the alteration of balance of contractual obligations.
- Covid-19 as force majeure - The current situation can possibly be considered as an “act of Government” constituting a specific case of force majeure. In case Force Majeure is applicable, a party is temporarily or definitely relieved from the performance of its obligations. In general, it is presumed that non-performance of a monetary obligation is not excused due force majeure.
- Abuse of law / acting in good faith – In any case, parties must consider the risk attached to unilaterally withholding any of their obligations. An abrupt and unilateral cessation of payment from the tenant, or threats from the landlord to terminate the agreement could be seen as a breach of contract or a non bona fide performance of it (theory of the abuse of law). Whether parties can call upon abuse of law is highly uncertain and will depend on the specific circumstances of the case.
In Finland, the law that regulates the leasing of commercial real estate is a non-discretionary law, which means that the law only applies, if the parties have not agreed differently.
- The tenant is allowed to rescind the leasing agreement, if he/she does not have access to the leased premises. This means that if shopping malls were to be closed, in some cases, the tenant could rescind their leasing agreement. Currently, the tenants do not have the possibility to rescind their agreements, unless specifically agreed upon in the lease agreements.
- Given the severity of the situation, this could be considered a case of Force Majeure and could lead to the agreement being adjusted between the parties or by the courts, if either of the parties made such a demand in the courts.
- It must be noted, that the government has not made any decisions regarding commercial lease agreements, which means that, in principle, landlords must make their possible mortgage payments and the tenants are responsible for paying rent.
In Finland, many people are agreeing upon different terms voluntarily.
In France, Specific measures have been taken by the French government in order to help affected companies and as regards commercial real estate, lessors can benefit from several measures.
- A specific ordinance dated March 25th 2020 allows the payment of rents, water, gas and electricity bills relating to professional and commercial premises to be deferred in full or spread over time and to waive the financial penalties and the suspensions, interruptions or reductions in supplies that may be applied in the event of non-payment of these bills.
- There are precise eligibility criteria for lessors to benefit from these measures. Only very small companies (10 or fewer employees) which started their activity before February 1st, 2020 may benefit from this scheme, provided that their last recorded turnover is less than 1 million Euros.
- As regards conditions related to the impact of the epidemic, these companies must either have been subject to a ban on receiving the public between March 1st 2020 and March 31st 2020, or have suffered a loss of turnover of at least 50% during the same period of time.
In Germany - The restrictions on individuals’ physical access to public spaces has had negative consequences for commercial landlords/lessors. However, these restrictions do not address the lessor's risk but rather the tenant's risk of use.
- Under German law, the tenant is generally not entitled to reduce the rent. However, landlords/lessors are prohibited from issuing a notice of termination due to a tenant’s failure to pay rent in the period 1 April to 30 June 2020 provided non-payment is due to the COVID-19 pandemic. This restriction also applies to commercial tenancies.
- Where specific terms and conditions of termination are agreed in commercial leases, these provisions are unchanged by the above temporary restriction. Equally, the tenant has no claim to extraordinary termination due to COVID-19.
- Amendments to rental agreements must be in writing. Amendments not in writing may result in a longer (statutory) termination period (6 months to the end of the quarter) by default as no valid agreement is in place any longer.
In Greece, a recently passed law provides that businesses, whose operation has been suspended or temporarily prohibited due to COVID-19 (such as retail shops, restaurants, cafés, hotels etc.) will benefit from a 40% reduction in the rent of March and April 2020 for the commercial lease of their premises.
- Payment of this reduced rent does not trigger termination of the lease by the Lessor or any other civil claim. The above is also applicable to financial leasing agreements of movables or immovables concluded for the same category of professional.
- A respective law provision is expected to pass on April 9th, for enterprises which have been “affected” by the Covid-19 (these enterprises have been set out by the state) concerning the rent of April.
- Apart from that, Article 388 of Greek Civil Code allows for any lessee to request from the lessor an adjustment of the rent for more months, triggering a material adverse change of the lease terms. If a contractual amendment is not reached, the lessee may file a lawsuit before the courts asking for the judicial adjustment of the rent provided that its turnover has been affected and this can be approved.
- Greek law does not provide that pandemic or any other events related to it constitute an event of “force majeure” and it does not have a definition of “force majeure” as far as it concerns lease agreements. A respective clause may exist in the respective lease agreement, which should be assessed respectively re. the rights and obligations of the parties.
In Ireland, the ban to avoid social contact that has resulted in restrictions for most business and consequently many legal and economic challenges for both landlords and tenants.
- Generally, during a crisis (see comment below regarding force majeure), a lease would not permit a tenant to stop or reduce its rent, particularly in the current COVID-19 crisis, and therefore a tenant does not have an entitlement to withhold rent or seek a rent reduction.
- An independent decision by a tenant to stop paying rent, or to reduce the amount of rent, constitutes a breach of covenant and the landlord would have several options to avail of, including an action for recovery of rent arrears, recourse to rental deposits (if any), claims against lease guarantors (if any) and seek forfeiture of the lease.
Protection from forfeiture for non-payment of rent
- There is currently no legislation in Ireland like say, section 82 of the Coronavirus Act 2020 which provides protections for forfeiture for non-payment of rent for the period commencing on 27th March to 30th June 2020 (subject to extension).
Agreement by landlord and tenant
- All the parties (e.g. landlord, tenant and guarantor (if any)) to a lease can decide together to enter an agreement or side letter to reduce or extend payment or forgo rent subject to obtaining legal and accounting advice.
Termination - Can a tenant terminate the lease as a result of the COVID-19 crisis?
- There is no explicit right to terminate a lease, as a result of the COVID-19 crisis, and it is unlikely that force majeure or the doctrine of frustration would apply in these circumstances.
- A contract is deemed to be frustrated where an unforeseen event makes it impossible for the contract to be fulfilled or the rights and obligations of the parties have become "substantially different" from those envisaged at the outset.
- A court is unlikely to imply such a provision into a lease and therefore it's improbable that either a non-performing landlord or tenant could defend non-compliance based on force majeure
In Italy - the extraordinary measures enacted by Italian Government (in particular, the forced closure of non-essential productive and commercial activities) have legal implications on the execution of non-residential lease agreements (governed by Law no. 392/1978).
- The order to shut down may be regarded as an event of force majeure (factum principis) allowing landlords to refuse the continued availability of the leased premises. From tenants’ perspective, the business interruption may constitute a reason for failing to pay, in whole or in part, the rents or to ask for a reduction thereof as well as to terminate the agreement on the basis of either the excessively burdensome of the rent (due to an exceptional or unpredictable event, such as the spread of COVID-19 and the implementation of the restrictive measures to mitigate it) or “serious grounds” (as per article 27 of Law no. 392/1978), if the shut-down results in (serious and to be demonstrated) financial hardships.
- It may be noted that, pursuant to Law Decree no. 18 of 17 March 2020, business owners who have leased property under land registry classification C1 (i.e. stores and shops) have been granted a tax credit of 60% of their March 2020 lease. This measure de facto cancels out the lease cost for the month and therefore a request for suspension of payment of the rent appears unjustifiable. However, if the suspension of business activities were to be extended but no tax relief concurrently granted, tenant may ask for suspension of payment. The tax credit is available for offset with effect from 25 March 2020, according to the instruction provided by Italian Revenue Agency Resolution no 13/E of 20 March 2020.
In Latvia, there are a number of protections for real estate lessors and the landlord’s rights to implement enforced recovery of delayed payment of rent are limited.
- Under the law related to the state of emergency due to the spread of COVID-19, creditors are forbidden to submit insolvency applications of debtors until 1 September 2020. In addition, upon commencing the recovery of a debt, the creditor is obliged to provide the debtor at least 60-day payment term before proceeding to court or initiating compulsory enforcement of notarial deeds.
- Furthermore, specific regulation has been created stating that lease payments for the use of property owned by state and local government institutions shall be waived fully or decreased for the duration of the state of emergency. The lessors are released from all contractual penalties in this regard as well.
- As in Denmark, Force Majeure may apply with respect to lessor’s obligation to pay lease payments and the consequent landlords rights to terminate the contract.
In Lithuania, the Government declared quarantine in the territory of Lithuania and took strict measures which affected big number of commercial retail and other commercial premises. It is also recommended for business to work from home as much as possible and stay home, which means that office spaces are not used or they are used partially.
- Quarantine and related restrictions in the country due to Coronavirus might be considered as Force majeure, however every situation needs to be evaluated individually. The principle of freedom of contract allows the parties to agree on what they specifically consider (or do not consider) to be Force Majeure circumstances, also the contract could provide rules of conduct of the party wishing to invoke Force Majeure must follow (i.e. a specific term to provide notification, etc.). It should also be verified whether the party has not assumed the risk of such circumstance or its consequences in the contract.
- As regards leases, some of commitments on the tenants’ duty to trade and keep open their shops is not possible because of quarantine and the tenant shall not be liable for that, however the quarantine circumstances do not automatically exempt the tenant from rent payments.
- It is obvious that both parties of the rental agreements face certain difficulties and this situation can be considered as a hardship. The parties may invoke the civil law institute for the performance of their contractual obligations in the event of a change in circumstances. Rebus sic stantibus (hardship clause) stipulates that if the performance of the contract becomes more difficult for one party than the other party and this results in great imbalance of the contractual obligations. In the absence of a consensus, the dispute may be submitted to a court which will decide either to terminate the contract or to modify the terms of the contract in order to restore the balance of the parties' contractual obligations.
Our advice in this situation is to communicate to the contracting party about the difficulties in performance of contractual obligations immediately and offering solutions of further cooperation. If this does not work described actions might be taken.
In Norway - the temporary restrictions imposed by the Norwegian government have a great impact on Norwegian businesses. This also applies to lessors of commercial real estate. As the lessees suffer a significant decline in demand, the lessors receive requests to grant rent exemptions or reducing of the monthly rent as the lessees try to avoid bankruptcy or a permanent or temporarily shut down of the business.
- In these cases, where the lessee has a reduced capacity to pay rent, the lessor must be aware that the lease guarantees offered by the banks are generally based on various conditions and requirements in the underlying agreements. To determine to what extent the terms of the lease can be altered without consent from the bank, the lessor must always control the terms of the bank guarantee, as this might be of significance to the lessor’s decision to grant postponement of rent payments or other changes of the payment structure.
- The lessor’s VAT-obligations are also based on the contractual rent, not the paid and received rent.
- As the lessees now are entitled to apply for compensation through a cash-aid scheme from the Norwegian Government, the lessor should be reticent to grant huge rent exemptions or postponement of payment at this time.
In Poland, landlords and lessors’ mutual obligations are suspended for the time of epidemic. Nevertheless, the contracts should be extended afterwards. Such an extension should cover period of epidemic plus an extra six months. If the contract is not extended, the suspension is retroactively cancelled and the lessee needs to pay for this period.
Mutual obligations suspension may affect bank loans extended to landlords (no rent is often defined as event of default).
In Spain, commercial tenants are required to continue to pay rent, but in the event that tenants fail to pay rent in breach of their leases, the terms of the lease may entitle the landlord to forfeit the lease. However, the doctrine of Rebus Sic Stantibus may apply.
- In general terms, the requirements for the application of the rebus sic stantibus doctrine (hardship clause) are the following: an alteration completely disconnected from the will of the parties, unpredictable risk and extraordinary nature of the circumstances, entailing an excessively onerous obligation/counter-performance for one of the parties or leading to the frustration of the end of the contract.
Its is recommend landlords do not accept a suspension or deferment of rental payments in general terms, but to analyse and negotiate case by case with tenants flexibilization measures regarding the payment of the rent corresponding to the month of April and successive shall the State of Alarm be in force.
In Switzerland, as most of the public accessible institutions have to be closed for a certain time span, the businesses of especially small and medium sized enterprises which rely on walk-in customers and leisure activities are hit particularly hard. Therefore, lessors will sooner or later be faced with tenants which cannot pay rent and, finally, have to close the businesses.
- It is very likely that tenants will first request a rent reduction arguing that they cannot use the property anymore as contractually agreed. However, whether the COVID-measures, which have forced tenants to close their stores, qualify as reason for a rent reduction is questionable and has not yet been decided.
- Furthermore, to protect tenants which cannot pay their rent due to the COVID-measures, the government has extended the time for payment regarding outstanding rent from 30 days to 90 days (applicable to rent which is due between March 13, 2020 and May 31, 2020). Especially, lessors shall be aware of this measure.
- With regard to the upcoming months, lessors will either have to terminate the lease contract or to support the tenant and, thus, may renegotiate the lease contract to enable the maintenance of the tenant’s business.
- Even so, if the lessor prefers to terminate these lease contracts, it will be faced with difficulties to find new tenants for their property, e.g. for selling spaces, as long as COVID-measures are in place but also afterwards. As a result, it might be helpful for the business of the lessor as well as of the tenant to find amicable and cooperative solutions in this extraordinary situation.
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Contact Information
If you would like to discuss any of the above issues with respect to different European countries please contact:
Belgium: Wouter Neven, Lydian, E: [email protected]
Denmark: Soren Brinkman, BKH Law. E: [email protected]
England: Jonathan Polin, Howard Kennedy. E: [email protected]
Estonia, Lithuania, Latvia: Urmas Ustav LEXTAL. E: [email protected]
France: Sebastian Pinot, Bignon Lebray, E: [email protected]
Finland: Olli Kiuru, Lexia E: [email protected]
Germany: Toni Ostler, Arnecke Sibeth Dabelstein. E: [email protected]
Greece: Anna Apostolaki, Tsibanoulis & Partners. E: [email protected]
Ireland: Barry Heslin, Whitney Moore Solicitors. E: [email protected]
Italy: Gabriele Bricchi, Pirola Pennuto Zei. E: [email protected]
Norway: Christoph Morck, Partner, Braekhus. [email protected]
Poland: Bartosz Marcinkowski, Partner, DZP. E: [email protected]
Spain: Luis Marimon, Partner, Marimon Abogados. E: [email protected]
Switzerland: Michael Baier – Wenger & Vieli: E: [email protected]
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Other posts in this series have covered:
- Health & Safety: National measures taken to prevent and control the spread of the Coronavirus in Europe and how it applies to businesses. Click here for the article
- Movement of people, goods and service: National measures applicable to the movement of people, goods and services in countries across Europe and how this is impacting business activity. Click here for the article
- Public Administrative Deadlines: National measures being taken to ease the burden on companies in terms of meeting their public administrative obligations and deadlines. Click here for the article
- Private Contractual Agreements: National measures taken to ease the burden on companies with respect to meeting their private contractual obligations and deadlines. Click here for the article.
- Business Continuity Part 1 - National measures taken to support companies in retaining and paying staff. Please click here for the article. Click here for the article
- Business Continuity Part 2 – National measures taken to support companies with financial assistance in terms of grants, loans and tax relief. Click here for the article.
- Access to public administrative services: Extent to which public administrative services needed by companies are available in countries across Europe and whether such services are digitized or require physical access. Click here for the article
- Impact on judicial proceedings: What measures are in place to enable essential judicial, mediation and arbitral proceedings to take place. Click here for the article
- Commercial Real Estate: Applicable measures taken and restrictions placed on retailers and businesses. Click here for the article