Coronavirus and Commercial Leases: Emergency Measures and Consequences on Lease Relationships
The outbreak of the new coronavirus SARS-CoV2 (which causes the COVID-19 disease) in Greece began at the beginning of March and “forced” us to live unprecedented situations. Schools, public services and authorities, commercial stores, catering, entertainment and tourist facilities, suddenly suspended their operation, either obligatorily, by order of a Public Authority, or optionally, by decision of the business itself. After almost four months having passed, it seems that the economic consequences on the market, due to the coronavirus pandemic, will be severe and hard to reverse. The majority of economists estimate that the national –as well as international- recession’s magnitude will be high, given that the state budget had to cover big financial gaps of natural persons and businesses for the months during which they did not work and did not operate respectively.
A. Content and beneficiaries of the emergency measures
To counterbalance the lack of revenue from the inability to conduct business activities or the reduction thereof, emergency measures were taken to support the affected businesses. Among these measures, even in the beginning of the pandemic outbreak, the reduction by 40% of the rent payable for real estate used as commercial premises has been legislated. Specifically, pursuant to a series of legal instruments, first of which being the Legislative Act of March 20th, 2020, the exemption from the payment of 40% of rents for March 2020 was provided for commercial lessees that obligatorily suspended their operation by order of a Public Authority, such as restaurants and coffee shops, malls, retail stores, entertainment and sports facilities etc. The measure was then extended for April also including the so called “affected” businesses based on their –main or secondary activity- Business Activity Codes as specified by the Ministry of Finance. Afterwards, under L. 4690/2020, same measure was extended also for May and June 2020 for businesses continuing to be financially affected, with the possibility of further extension until the month of August, by virtue of relevant Ministerial Decisions to be issued which shall specify the beneficiaries of the extension by sector and by month.
B. Configuration of the Lease Relationship under the emergency measures
By way of derogation of the applicable provisions regarding leases, the businesses-lessees, which were defined as beneficiaries of the emergency measures, paid for March, April, May and June 2020 60% of the rent payable. On the lessor’s part, the receipt of 60% of the rent’s amount constitutes an obligatory reduction by law and is binding for him. As per explicit law provision, the partial non-payment of the amount of the rent does not provide the lessor with the right to terminate the contract or with any other civic claim on his part. So, the lessor is obliged neither to reject the lessee’s reduced consideration nor terminate on this ground their lease contract.
Meanwhile, the property owners, to whom the reduced rent was paid, are entitled, on their part, to a series of emergency facilitations, as compensation for their losses. To begin with, the amount of the rent that was not or is not collected (40%) does not constitute income and, thus, is not subject to income tax or special solidarity contribution (a. 43A ITC). Furthermore, the lessors, provided that they received the amount of the rent reduced by at least 40%, have the right to deduct an amount equal to 20% on 60% of the amount of the rents, from debts to the tax authority with a deadline for payment from 31.07.2020 onwards (with the exception of debts arising from regulations/facilitations of partial payment, debts to a foreign State and debts from state aid recovery). In case that the lessors are natural persons, the deadlines for the payment of certified debts and of possible installments of regulations/facilitations of partial payment to the tax authority are extended and the collection of overdue debts is suspended for a period equal to the months, during which they received reduced rent, i.e. for two to four months (starting from June 2020), whilst for the suspension period, interest and late payment surcharges are not calculated. Finally, 25% of the abovementioned debts which may have been paid from 11.3.2020 until June or which will be paid on time, is set off by other certified tax debts or installments of regulations/facilitations of partial payment, whose payment deadlines are from 31.7.2020 onwards (with the exception of VAT and withholding taxes not subject to partial payment facilitation/regulation regime debts, state aid recovery debts and debts to a foreign State).
The lease relationship, however, in parallel with these emergency regulations, does not seem to cease to be also regulated by the general provisions of the Civil Code.
C. Invocation of Force Majeure and Unpredictable Change of Circumstances
I. Force Majeure
Pursuant to Articles 335 and 336 of the Civil Code, when, during its fulfillment, the obligation is wholly or partially impossible, the debtor is exempted from any liability arising from his inability to fulfill the obligation, provided that the inability is due to an event, for which he bears no responsibility. Non-culpable inability to fulfill an obligation is the one not due to any fault or negligence of the debtor or of persons, for which the debtor is liable, but rather the one that is due to force majeure or any random event.
According to settled case law, force majeure means any unforeseen and extraordinary event, either objective or relative to the beneficiary, which cannot be prevented by measures of extreme care and caution of the average person. Thus, for the exemption from liability on the basis of force majeure, the following requirements must be met cumulatively:
- the force majeure incident to have caused the inability to fulfill the obligation or the delay of the fulfillment,
- the non-fulfillment of the obligation to have been caused by circumstances beyond the invoking party’s control, and
- other justified measures or actions, which could have been taken in order to prevent or moderate the event and its consequences, to have not existed.
II. The Coronavirus as an Event of Force Majeure and the Fulfillment of the Lease Obligations
As regards the commercial leases, from the provision of Article 596 of the Civil Code it appears that the lessee is exempted from the payment of the rent, if he is hindered to use the leasehold for reasons not related to him. Although Greek Law does not provide for the pandemic as a reason of force majeure, it could be argued that the coronavirus pandemic is such an event, since it is a phenomenon, which could not have been foreseen by the average cautious transactor, while the measures taken for its handling are obligatory, without the possibility of preventing them, and determinant for a great range of business activities.
However, it is not safe to abstractly judge what constitutes force majeure, since it should be each time reviewed to what extent the coronavirus’ effect has been catalytic for the operation of each contract. Moreover, the consequences of the pandemic on the economic conditions, which may cause inability to fulfill or delay during the fulfillment, do not necessarily constitute a reason of force majeure. Additionally, it has always been accepted that in monetary obligations, such as the lessee’s obligation to pay the monthly rent to the lessor, there is no subsequent inability of fulfillment and consequent exemption of the debtor from liability. This means that in principle the lessee cannot deny his basic monetary obligation, even if there are force majeure reasons, since the monetary obligation is always feasible.
In any case, in order to examine the matter more thoroughly, we should distinguish two separate cases: businesses suspending their operation, by order of a Public Authority and businesses considered by the legislator as severely affected. The reduction by 40% applies to both cases, as analyzed, however, is a full exemption from rent payment possible for the months during which the business does not operate or is deemed as affected?
In case that the business is characterized as “affected”, it can easily be deducted that this fact alone does not provide the business with the right to fully deny paying the rent for the corresponding time, because this does not constitute a force majeure reason, since the lessee could make use of the leased property, just possibly with a reduced turnover. Consequently, it is not possible for the lessee, in this case, to invoke a force majeure reason and to be fully exempt from rent; rather, in any case, 60% of the rent amount will be due.
The answer, however, could be different for the businesses, whose operation was suspended by order of a Public Authority. In this case, the use of the property for the exercise of the lessee’s professional activity became impossible for reasons that do not concern him. Thus, in this case, the question arises as to whether the emergency regulations regarding the reduction by 40% of the payable amount of rents exclude the abovementioned provisions of the Civil Code, pursuant to which there is full exemption from the rent, if any force majeure reason hinders the lessee from making agreed use of the property.
The answer to this question is difficult, given that the emergency regulations were legislated in a short period of time and have created legal inaccuracies. It seems that the emergency regulations do not exclude the application of the Civil Code’s general provisions, since the legislator enacted the rent reduction “by derogation of the current lease provisions”. The legislator’s goal with this regulation was not to put the lessees into a more unfavorable regime, since, had this regulation not existed, the lessee would be fully exempt from paying rent, whilst now he would be obligated to pay 60% of the rent. The opposite could also be argued, i.e. that the emergency regulations, as more specific provisions, prevail over the general provisions and that under no circumstances can a full exemption from the rent be demanded, but only the reduction, pursuant to the law. In any case, given the unprecedented prevailing situations, the relevant issues are expected to be resolved on a case-by-case basis on court level in the near future, according to the specific conditions of each contractual relationship.
III. Unpredictable change of conditions and adjustment of the rent, pursuant to Articles 388 and 288 of the Civil Code
Pursuant to Article 388 of the Civil Code, if the circumstances, on which the parties based the conclusion of a bilateral agreement (such as the lease), later changed by causes that were urgent and could not be foreseen, and if, due to this change, the debtor’s obligation became overly burdening, the court may, by its ruling, after the debtor’s claim, reduce it to the appropriate extent. Just the fact that one party is damaged or faces difficulties in fulfilling its obligation is not enough; however, neither needs there to be total financial destruction of the debtor-lessee.
Urgent and unpredictable incidents, within the meaning of the above article, are those that occur from unusual events, natural, political, social, economic, etc. As urgent and unexpected events cannot be characterized those that usually occur, such as the fluctuation of the lessee’s financial situation, the increase/decrease in the value of the property and the subsequent corresponding change in its rental value which may be due to e.g. increase/decrease of the demand for leasing similar properties.
If from the above conditions for the application of Article 388 of the Civil Code the one of the unexpected and non-culpable changes of conditions does not apply, then the application of Article 288 of the Civil Code is allowed and the adjustment of the initial or adjusted amount of the rent may be requested, if, later, due to foreseen or unforeseen circumstances, an unbearable for the lessee change of conditions occurred. Such change may be a significant increase/decrease in the rental value of the lease, or, the fluctuation, for various reasons, in the demand for properties, so that, under certain conditions, the persistence to pay the agreed amount of rent may be contrary to the candour and fairness required in transactions. In fact and in relation to leases (and commercial agreements in general) during the recent economic crisis, which has been ruled (by part of jurisprudence) to be an unpredictable event that has substantially changed conditions, many lessees succeeded in judicially adjusting the amount of the rent payable.
The coronavirus pandemic, as mentioned above, is indeed an unpredictable event that has already changed market conditions, but at this stage, it is too early to say that it is a generalized and permanent change, as there is still no tangible financial data capable of leading to the conclusion that it has caused a substantial reduction in financial figures for an extended period of time. During the coming period, it will begin to appear if e.g. business turnover and property rental values will decrease temporarily or for a longer period of time. It should be noted once again that relevant issues concerning the specialization of vague concepts, such as that of a change of that size capable to redefine the terms of a contract, are expected to be resolved by the competent courts again on a case-by-case basis.
D. Concluding Remarks
Undoubtedly, the coronavirus pandemic has affected all areas of daily life and has had a significant impact on the global and domestic economy and entrepreneurship. The suspension of the operation of the largest range of businesses, from small retail stores to large hotel units and airlines, was necessary to be accompanied by exceptional and urgent support measures, in order to ensure at least to some extent the viability of the affected businesses. Given the large percentage of businesses that rent their premises, the reduction in the amount of rents offers significant facilitation – along with the rest of the emergency support measures – to businesses that were and continue to be affected by the pandemic. At the same time, in order to balance the interests of both parties, it became necessary to support also the property owners, who, being unable to oppose to the emergency measures, pledged to reduce their income for a period which could reach up to six months, without further extension during the fall being excluded. In any case, the general principle of good faith performance of obligations should always apply to contractual relations and, therefore, businesses for which the 40% reduction in rent is not sufficient to face the dire and unprecedented economic situation in which they found themselves, could under conditions and depending on the specific characteristics of each case, claim further judicial adjustment of the payable rent.