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The Coronavirus Pandemic as a reason for non-payment of rent

The Coronavirus Pandemic as a reason for non-payment of rent

Legal Insight

March 2020

George Psarakis LL.M. (mult.), PgCert

Republished from Euro2Day.gr

Summary: This article briefly discusses the possibilities for the tenant of a commercial lease to refuse to pay the agreed rent in full, under certain circumstances, in view of the coronavirus pandemic, based not only on the new specific regulations but also on the general provisions of our Civil Code.

There is no doubt that we are facing an unprecedented crisis. Unprecedented situations for all of us who come to face daily fear for our own health and that of our fellow human beings. At the same time, however, we are also facing the economic effects of this crisis. Businesses are being closed by executive decision, markets are dying, transactions between businesses are becoming fewer and fewer, with any credits being cut and the terms of payment hitherto in force being altered.

The Covid-19 pandemic is a force majeure event. This is because it is beyond the control and influence of the market players and at the same time it is an unpredictable and irresistible event (such as an earthquake, war, etc.). Already since last month, dozens of articles have been written in the foreign legal press (mainly online) on the issue of the fate of contracts following the WHO's declaration of a pandemic. 

One issue of interest to a large number of businesses at this particular time is that of the fate of commercial leases. Yes, the State, in the Legislative Act of 20/3/2020, stipulated that 60% of the rent will be paid for the months of March and April 2020 on leases of commercial premises whose operation has been suspended by law, but two questions have arisen: (a) why there is an obligation to pay 60% of a lease even when there is not even minimal use of the property and (b) what is the fate of the lease payments to other businesses that have been affected by this crisis but whose operation was not suspended by a state decision.

1. On the first issue the following should be mentioned: Already according to our Civil Code (Article 596), it is provided that the lessee is exempted from paying rent if he is prevented from using the leased premises (tenancy) for reasons that do not concern him or fall within his sphere of influence. In other words, he is exempted from this obligation if he is prevented from using the premises for reasons of, for example, force majeure, i.e. unforeseeable events that could not have been prevented, even with the exercise of exceptional care and diligence. In this particular case, in fact, the operation of the business concerned has been prohibited by the State and it is therefore completely impossible to use the premises, not because, for example, the business itself has decided to cease operating in order to reduce costs, but because it is required by a rule of law. Moreover, a corresponding exemption from the payment of rent, in whole or in part, can also be obtained by accepting that the restrictions on use in question constitute a real defect in the lease (Article 576 of the Civil Code). This is because any deviation from the agreed and expected condition of the leased premises, including that imposed by law or which poses a risk to the health of its users, constitutes a real defect (as our case law states in relation to Article 576 of the Civil Code: 'The prevention of the use of the leased premises by measures imposed by law is also considered a defect. [...] The tenant is therefore entitled to demand ... a corresponding reduction in the rent or exemption from the obligation to pay it").

At this point, however, the legislator came along and issued the above-mentioned MNP, which obliged the lessee, whose business operations had been suspended by ministerial decision, to pay 60 % of the rent. The provision reads, "The lessee of a commercial lease for the establishment of a business for which special and extraordinary measures have been taken to suspend or temporarily prohibit operation for preventive or suppressive reasons related to the COVID-19 coronavirus shall be exempted from the obligation to pay 40% of the total rent for the months of March and April 2020, notwithstanding the applicable provisions on leases." 

Therefore, there are two possibilities: a) either the legislator's purpose was to balance the resulting burden by passing part of it on to the leasing company, i.e. by making a cut in relation to the Civil Code; b) or his purpose was to apply the 40% limitation only in cases where the leasing contract has agreed that the lessee bears the rent in full, even when the use of the property became impossible due to force majeure. 

In other words, in the first case, because without this PPA the lessee would not have paid the rent in full, the legislator has come to "share the burden" by forcing the lessee to pay 60% of the rent, thus in effect benefiting the landlord-tenants. In the second case, the legislator seems to have wanted to support businesses that had already agreed in their lease to pay rent even in the event of force majeure, by reducing their financial burden, which would otherwise amount to 100% of the rent, by 40%. However, where, under this second option, there is no such agreement in the lease (i.e. forcing the tenant company to pay the rent even if it does not use the premises for reasons of force majeure), then the exemption from payment of the rent is complete, since the above provisions of the Civil Code apply. 

In any case, obviously the best solution is a compromise agreement between the parties in order to avoid future litigation. The parties are the ones who are best aware of the limitations of use and their specific financial possibilities.

2. The answer to the second question seems simpler: since the WFD does not apply (since the operation of the businesses in question has not been prohibited), then our Civil Code applies and what it says about leases and the impossibility of using the lease (see above). In this particular case, where the WHO has declared a general pandemic and the Greek Government has, among other things, imposed restrictions on the movement of citizens, decided to suspend the operation of an extremely large number of businesses, as well as prohibiting the co-location of businesses in the area, and has decided to suspend the operation of a very large number of businesses. In order to make such a claim, it must be shown that it is impossible, in whole or in part, to use the business premises in question as agreed. For example, when, based on the decision of the Athens Bar Association of 16/3/2020, teleworking is almost mandatory (otherwise there is a risk of disciplinary control) in law offices and it is now almost impossible to access the clients for private contacts due to a curfew, tenant lawyers-law firms can legitimately argue that no rent is due (or at least 100% of it) because the agreed use was that of the law firm and not the other way round. (in case it is argued by the landlord that the firm's equipment remains in the lease and is therefore used). Conversely, no such claim can be made for uses relating to food shops or bank branches and debtors' information companies that continue to operate normally; or for uses that are anyway related to distance working and rely on electronic infrastructure (e.g. e-shop headquarters, e-shop). Of course, we should always refer to the individual contractual texts (leases) as there may be specific agreements/deviations from the above (as the specific provisions are, as we say, of an intrastatutory nature and therefore something different may be agreed if the parties had considered from the outset that, for example, the risk of inability to use the leased premises due to force majeure would be borne exclusively by the lessee). Moreover, if, despite the above, the business is making normal use of the premises contrary to the requirements of the relevant bodies, just as it did before the declaration of the pandemic and the adoption of the above-mentioned regulatory measures, then the above rights cannot be exercised and the rent must be paid as normal.

3. As for the issue of most businesses that have already paid the March 2020 rent in advance, it will obviously either have to be returned by the landlord as unduly paid, or it will be offset against the next rent when the tenancy starts to operate smoothly again. Finally, with regard to any thoughts of a downward rent adjustment due to the crisis that has already hit the market, it is too early to give an answer. This is because the use of the relevant articles of our Civil Code (articles 288 and 388, which we have often read about in recent days) require - among other things - a more permanent change of circumstances, not a temporary one. Therefore, time will tell whether, for example, the turnover of businesses and the rental values of real estate will decrease temporarily or for a longer period of time.

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